Deposit Flight

Deposit flight can be gradual or sudden. A gradual outflow might happen when interest rates rise and depositors move money from accounts paying little interest to higher-paying savings accounts, money market funds or government bonds. A sudden outflow happens when depositors lose confidence in a bank and rush to move their money, which in its most severe form becomes a bank run.

Deposit flight can also happen at a national level. During a financial or political crisis, depositors may move money out of the country's banks to banks abroad or into foreign currencies, putting pressure on the banking system and the exchange rate.

For example, if a mid-sized bank reports large losses, business customers with deposits above the insurance limit might move their money to larger banks they see as safer.

Banks watch deposit trends closely and hold liquid assets to cope with outflows. Regulators monitor deposit flight because it can turn manageable problems into crises, and governments sometimes respond with measures such as increased deposit guarantees or limits on withdrawals.