A bank run is a self-reinforcing liquidity crisis in which depositors, doubting a bank's solvency, rush to withdraw their money before others do. Because banks operate on fractional reserve principles—lending out most deposits and holding only a small share as cash—no institution can meet simultaneous withdrawal demands from all customers, even when its underlying assets are sound. A run can therefore turn a temporary liquidity shortfall into outright insolvency.
Economists Douglas Diamond and Philip Dybvig formalized this dynamic in their 1983 model, showing that bank runs are a rational equilibrium under panic conditions: if a depositor expects others to withdraw, withdrawing first is the individually optimal choice. Diamond and Dybvig shared the 2022 Nobel Prize in Economic Sciences with Ben Bernanke partly for this work.
Historical episodes shaped modern policy. Waves of US bank failures in 1930–1933 contributed to the Great Depression and prompted the creation of the Federal Deposit Insurance Corporation (FDIC) under the Banking Act of 1933, which insures deposits up to a statutory limit. Comparable schemes exist elsewhere, such as the EU's Deposit Guarantee Schemes Directive.
Modern runs can unfold far faster than traditional ones. In September 2007, depositors queued outside branches of the UK's Northern Rock, the first British bank run in over a century. In March 2023, Silicon Valley Bank collapsed within roughly 48 hours after large, uninsured tech-sector depositors withdrew funds electronically—often described as the first major "digital" bank run. Credit Suisse was absorbed by UBS days later amid related contagion fears.
Standard policy tools to halt runs include:
- Deposit insurance to reassure small depositors.
- Lender-of-last-resort facilities at central banks, a role articulated by Walter Bagehot in Lombard Street (1873): lend freely, against good collateral, at a penalty rate.
- Temporary withdrawal limits or bank holidays.
- Capital and liquidity regulation, such as the Basel III Liquidity Coverage Ratio.
Example
In March 2023, Silicon Valley Bank suffered a bank run when depositors withdrew roughly $42 billion in a single day, prompting the FDIC to take the bank into receivership.
Frequently asked questions
Government-backed deposit insurance (such as the FDIC in the US) combined with central bank lender-of-last-resort facilities that supply emergency liquidity against collateral.
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