A bank run occurs when most customers withdraw their cash from the bank out of fear of solvency and bankruptcy.
What Is a Bank Run?
Bank runs occur when customers withdraw money from banks out of panic that the institutions may run out of money. A bank only has limited cash reserves at a certain time. The rest of the amount is invested or loaned out to businesses.
In the occurrence of a bank run, the bank may not have enough cash on hand to deal with withdrawal demand. They, therefore, lack the actual cash needed to satisfy withdrawal requests. As a result, banks run out of money as more customers request withdrawals from their accounts, increasing the likelihood that they would collapse or go bankrupt.
In the financial industry, customers are the determining factor that can either make or break an institution over security concerns. Banks will run smoothly when the customer feels their money is secure and there is no cause for alarm.
How Does Bank Run Occur?
One of the predominant causes of a bank run is the quick spread of rumors that a bank is running out of money in its deposited reserve. The negative sentiment triggers fear and anxiety in a customer who acts by immediately making withdrawals without even verifying the news.
It can also result from a cash shortage in a specific reserve. For example, when a branch of the bank runs out of cash, many customers fail to withdraw from that branch as cash-at-hand is unavailable. If the same scenario occurs in multiple bank premises, the news of insolvency can spread and cause further withdrawals putting a bank at risk of a systemic banking crisis.
History of Bank Runs
Bank runs have existed as long as civilization has existed, but in the modern era, the first major occurrence was during the Great Depression. Due to the stock market collapse, people queued up outside banks to withdraw funds causing a bank run.
The most recent bank run experience was in 2019 in the UK with MetroBank. Rumors spread that MetroBank was confiscating its users’ funds, and the subsequent panic triggered a bank run.
Preventing Bank Runs
After the economic collapse of 2008, authorities took proper measures to prevent bank runs and to stop them at their root cause. A few are mentioned below:
Increasing the threshold of cash in hand so that banks can meet demands in the case of a bank run.
Ensuring users that their cash is reserved and safe. Implementing a more transparent system.
Banks are also permitted to take a holiday when demands get too much to increase their cash reserves. Overall, banks are supposed to stay close to the ideal liquidity ratio.