Bank Run
A bank run is a rush by depositors or other short-term creditors to withdraw their money from an institution because they fear it will fail. Because no bank holds enough liquid assets to repay everyone at once, the rush itself can cause the failure.
Also called: bank runs · run on the bank · deposit run · run
A bank funds long-term loans with deposits that can be withdrawn on demand. That works as long as depositors do not all ask together. If confidence slips, each depositor has a reason to get out before the others, since those at the back of the queue may not be paid. A run can therefore bring down a bank that was solvent.
Deposit insurance and the central bank's role as lender of last resort were designed to remove that incentive. They cover banks. They do not cover uninsured balances, and they do not cover the institutions of shadow banking, where runs take the form of investors redeeming from a money market fund or lenders refusing to renew repo funding.
Runs are now faster. In March 2023 customers of Silicon Valley Bank requested withdrawals of about US$42 billion in a single day through online banking. The same logic applies to a stablecoin whose reserves are doubted. For a payment firm the lesson is concentration: operating and safeguarded funds held at one bank are exposed to that bank's liquidity.
See also
- Maturity TransformationMaturity transformation is the practice of funding long-term, illiquid assets with short-term liabilities that can be withdrawn or must be renewed quickly. It is the core economic function of banking and the source of its fragility.
- Shadow BankingShadow banking is credit intermediation carried out by institutions and markets outside the regular banking system: money market funds, finance companies, hedge funds, securitisation vehicles and repo markets doing what banks do without bank licences, deposit insurance or central bank backing.
- Commercial Bank MoneyCommercial bank money is the money that exists as deposits at commercial banks. It is a private bank's promise to pay, created when banks lend, and makes up the large majority of the money that households and businesses actually use.
- Money Market FundA money market fund (MMF) is an investment fund that holds short-term, high-quality debt such as Treasury bills, repo and commercial paper, and aims to keep a stable value while offering daily access. Investors use it like a deposit, but it is not one.
- SafeguardingSafeguarding is the statutory requirement that an authorized payment or e-money firm keep customer funds apart from its own money, by a method the rules prescribe, so the funds are identifiable and returnable to customers if the firm fails. It is a licensing condition, not best practice.
- Proof of ReservesProof of reserves is published evidence that an issuer or exchange holds the assets it says it holds — typically a third-party verification report on holdings as at a single date, sometimes paired with a cryptographic exercise letting customers check that their own balance was counted. It is not an audit.