Understanding Bank Runs

What is a bank run?

A bank run occurs when a large number of customers try to withdraw their deposits at the same time because they fear the bank is or will become insolvent. Because banks keep only a fraction of deposits as cash on hand, simultaneous withdrawals can exhaust available liquidity and push a solvent bank into failure.

How bank runs work

• Banks operate by transforming short-term deposits into longer-term assets (loans, securities). Only a fraction of deposits is held as cash or reserves.
• If depositors lose confidence, withdrawals spike. To meet those demands, banks may sell assets quickly—often at a loss—which weakens capital and fuels further withdrawals.
• Panic, not necessarily actual insolvency, often initiates runs. But a severe run can cause insolvency even for otherwise healthy institutions.
• Modern runs can be physical (customers at branches) or electronic (mass ACH/wire transfers).

Recent and historical examples

• Great Depression (1930s): Widespread panic after the 1929 crash led to runs on thousands of U.S. banks and major economic contraction.
• Silicon Valley Bank (March 2023): Reported it needed $2.25 billion to bolster its balance sheet; about $42 billion was withdrawn by the end of the next business day. Regulators closed the bank; it was the second-largest U.S. bank failure by asset size (about $209 billion reported Q4 2022).
• Washington Mutual (2008): Faced a run that saw roughly $16.7 billion withdrawn within two weeks. It failed with about $310 billion in assets and was acquired by JPMorgan Chase.
• Wachovia (2008): Withdrawals of over $15 billion in two weeks following poor earnings results contributed to its sale to Wells Fargo.

Note: Some high-profile failures (e.g., Lehman Brothers, AIG, Bear Stearns) were driven by credit, derivatives, and liquidity stresses rather than classic depositor bank runs.

Silent bank runs

A silent bank run is a mass withdrawal executed electronically—via ACH, wire transfers, or other non‑cash means—without customers physically visiting branches. Because funds move rapidly, silent runs can accelerate a bank’s liquidity crisis.

Prevention and policy responses

Governments and regulators use several tools to prevent or limit runs:
* Deposit insurance: In the U.S., the FDIC insures deposits (generally up to $250,000 per depositor, per ownership category), reducing incentives for panic withdrawals.
* Lender-of-last-resort: Central banks provide emergency liquidity to solvent banks facing temporary funding shortages.
* Reserve management: Banks hold reserves (including at central banks); programs like the Federal Reserve’s interest on reserve balances (IORB) affect banks’ incentives to hold reserves.
* Regulatory supervision and stress testing: Ongoing oversight aims to identify and correct vulnerabilities before they prompt runs.
* Temporary closures or “bank holidays” and orderly resolution mechanisms can stop runs while authorities assess solvency.

What depositors can do

• Keep deposits within FDIC insurance limits or diversify across ownership categories and multiple institutions to increase insured coverage.
• Use brokerage cash management tools, Treasury direct, or other insured vehicles for large balances.
• Monitor communications from your bank and regulators during periods of stress before making abrupt decisions.

Key takeaways

• A bank run is mass withdrawal of deposits driven by fear of insolvency; panic can turn a healthy bank into a failed one.
• Modern runs can be physical or electronic (silent runs), and they can unfold very quickly.
• Deposit insurance, central-bank liquidity, regulation, and transparent communication are principal defenses.
• Individual protection includes staying within insurance limits or diversifying where you hold large balances.