Bank run: meaning, causes and a worked example

What is a bank run

A bank run is when many depositors withdraw their money from a bank at the same time because they fear the bank may fail.

A bank keeps only part of its deposits as cash. It lends out or invests the rest (see fractional reserve banking). On a normal day, withdrawals are small compared with the cash on hand. In a run, withdrawals grow faster than the bank can raise cash, and the fear of failure can become the cause of failure.

Formal definition

For experienced readers, a bank run is a liquidity event, not necessarily a solvency event:

• Liquidity problem: the bank's assets are worth more than its liabilities, but they cannot be sold quickly at full price.
• Solvency problem: the assets are worth less than the liabilities, whatever the timing.

A run can push a solvent bank into insolvency. To meet withdrawals it may have to sell long-term loans or bonds at a loss (a fire sale). This is why economists describe runs as self-fulfilling.

Bank run causes

• Rumours or news of losses, often spread quickly on social media and messaging apps
• A large loss in the bank's bond portfolio when interest rates rise
• Deposits concentrated among a few large clients who all leave together
• Doubts about deposit protection or government support
• Trouble at a similar bank (financial contagion)

Worked example (hypothetical)

Take a hypothetical bank called Bank A. Most of its deposits are lent out as long-term home loans. Only a small share is held as cash.

1. A rumour says Bank A has a large loss.
2. Some depositors withdraw. Bank A pays them from its cash.
3. Others see queues and online posts, and they withdraw too.
4. The cash runs out. Bank A sells its loans quickly, below their value, to raise more.
5. These losses shrink its capital. The rumour now becomes true.
6. The regulator steps in. It may close the bank, merge it, or apply a bail-in, where some creditors absorb losses.

Nothing about the loans changed in steps one to three. Only confidence changed.

Where the term appears

• News: headlines about queues at branches, fast online withdrawals, or a bank's shares being halted
• Central bank and regulator reports: financial stability reviews discuss deposit flight and liquidity buffers
• Markets: during a run, traders often see a flight to quality. Bank shares fall, government bond yields drop, gold and safe-haven currencies can move sharply, and credit spreads widen.

Sudden moves like these can create large gaps in prices. Leveraged CFD and forex positions can lose money fast in such conditions. See risk management.

Edge cases

• Digital run: withdrawals happen by app within hours, with no queues.
• Silent run: large depositors move money quietly before the public notices.
• Run on non-banks: money market funds, payment firms or crypto platforms can face the same mechanism. Their users may have no deposit protection at all.
• Systemic run: depositors leave many banks at once, which can lead to a credit crunch.

Related terms

• Fractional reserve banking
• Bail-in
• Financial contagion
• Credit crunch
• Default
• Counterparty
• Black swan
• Trading glossary

Frequent questions

What is a bank run in simple words?

Many people take their money out of a bank at once because they fear it will fail.

Does a bank run mean the bank was already bankrupt?

Not always. A healthy bank can fail in a run because it cannot turn long-term assets into cash fast enough.

What stops bank runs?

Deposit protection schemes, central bank emergency lending and clear communication from regulators reduce the reason to rush.

Why do traders care about bank runs?

Runs can move bank shares, bonds, gold and currencies sharply. Spreads can widen and prices can gap.