Bank Run

Banks keep only a small portion of deposits as cash and lend out the rest. Under normal conditions, this works because only a few customers withdraw money on any given day. But if many depositors believe the bank is in trouble and try to withdraw at once, the bank may not have enough cash available.

Bank runs can become self-fulfilling. Even a healthy bank can be pushed into failure if enough people panic, because it may have to sell assets quickly at low prices to raise cash. Fear spreads as people see others withdrawing, encouraging still more withdrawals.

Today, runs can happen very quickly, because customers can move money instantly through online and mobile banking, and news and rumours spread rapidly on social media.

To prevent runs, governments use deposit insurance, which reassures customers that their money is protected up to a limit. Central banks can act as a lender of last resort, providing emergency funding to banks facing sudden withdrawals. Regulators also require banks to hold enough liquid assets and capital to withstand stress.