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A Bank Run

A bank run (also known as a run on the bank) occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent.

A bank run can occur even when started by a false story. Even depositors who know the story is false will have an incentive to

withdraw, if they suspect other depositors will believe the story.

A banking panic or bank panic is a financial crisis that occurs when many banks suffer runsat the same time. A systemic banking crisis is

one where all or almost all of the banking capital in a country is wiped out. The resulting chain of bankruptcies can cause a long economic

recession.

Several techniques can help to prevent bank runs, though they do not always work.

1. A bank can temporarily suspend withdrawals to stop a run. This is called suspension of convertibility.

2. Bank regulation can impose a reserve ratio requirement, which limits the proportion of deposits which a bank can lend out. This makes

it less likely for a bank run to start, as more reserves will be available to satisfy the demands of depositors.

3. Deposit insurance systems insure each depositor up to a certain

amount, so that their savings are protected even if the bank fails. This removes the incentive to withdraw deposits simply because others are withdrawing theirs.

Many of the recessions in the United States were caused by banking panics. The Great Depression contained several banking crises

consisting of runs on multiple banks from 1929 to 1933.

The financial crisis of 2007–2009 was centered around market- liquidity failures that were comparable to a bank run. The crisis

contained a wave of bank nationalizations. It was caused by low real interest rates. They stimulated an asset price bubble fueled by new

financial products that were not stress tested and that failed in the downturn.

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