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CandleFocus Glossary Editor
A bank run is a large and sudden withdrawal of funds from a financial institution, by a great number of customers, and may result from panic or lack of trust. It is a situation in which customers withdraw more of their funds than what the bank is able to keep in reserve.
A bank run is not only caused by news reports, but is also triggered by rumors and gossip. It is usually fueled by panic and an overall lack of confidence in a given financial institution. People believe the situation is out of control and that the deposits are at risk of being lost. This fear causes customers to panic, leading them to take out their deposits quicker than they would normally, creating a bank run.
When a bank run begins, it can have devastating effects on the bank. Customers start to lose confidence in a bank, and the more deposits that are withdrawn, the lower the amount of bank reserves available to cover obligations. These withdrawals create a spiral effect, which can lead to the rapid collapse of a bank due to lack of overall liquidity. Bank runs are usually self-perpetuating, and only stop when the bank can assure its customers that their deposits are safe.
The Federal Deposit Insurance Corporation, or FDIC, was set up to prevent bank runs in 1933 during the Great Depression, when thousands of banks failed due to large bank runs. In 2008-09, the FDIC insured deposits up to $250,000 - this amount helps to minimize runs on banks by people attempting to withdraw deposits before the bank becomes insolvent.
In addition to physical bank runs, there are also silent bank runs that occur when funds are removed through electronic or online transfer. These silent runs can be just as damaging as traditional bank runs, and they can sometimes occur before physical runs and can quickly spiral into a massive withdrawal of funds.
Bank runs are an example of a situation in which the actions of individuals can have a detrimental effect on a system as a whole. When one person withdraws funds and loses faith in the system, the trust of others can be quickly weakened. In order to minimize the chance of a bank run from occurring, it is important for banks to maintain confidence in their operations, and to be open and transparent about their financial status. To prevent a future financial disaster, regulations need to be in place to ensure that banks remain reliable, trustworthy institutions.
A bank run is not only caused by news reports, but is also triggered by rumors and gossip. It is usually fueled by panic and an overall lack of confidence in a given financial institution. People believe the situation is out of control and that the deposits are at risk of being lost. This fear causes customers to panic, leading them to take out their deposits quicker than they would normally, creating a bank run.
When a bank run begins, it can have devastating effects on the bank. Customers start to lose confidence in a bank, and the more deposits that are withdrawn, the lower the amount of bank reserves available to cover obligations. These withdrawals create a spiral effect, which can lead to the rapid collapse of a bank due to lack of overall liquidity. Bank runs are usually self-perpetuating, and only stop when the bank can assure its customers that their deposits are safe.
The Federal Deposit Insurance Corporation, or FDIC, was set up to prevent bank runs in 1933 during the Great Depression, when thousands of banks failed due to large bank runs. In 2008-09, the FDIC insured deposits up to $250,000 - this amount helps to minimize runs on banks by people attempting to withdraw deposits before the bank becomes insolvent.
In addition to physical bank runs, there are also silent bank runs that occur when funds are removed through electronic or online transfer. These silent runs can be just as damaging as traditional bank runs, and they can sometimes occur before physical runs and can quickly spiral into a massive withdrawal of funds.
Bank runs are an example of a situation in which the actions of individuals can have a detrimental effect on a system as a whole. When one person withdraws funds and loses faith in the system, the trust of others can be quickly weakened. In order to minimize the chance of a bank run from occurring, it is important for banks to maintain confidence in their operations, and to be open and transparent about their financial status. To prevent a future financial disaster, regulations need to be in place to ensure that banks remain reliable, trustworthy institutions.