What is a bank run?
This is when a large amount of customers withdraw cash from the same bank at the same time because of rumours of the bank’s instability. Despite the validity of these rumours, the chain reaction caused by so many withdrawals actually increases the bank’s likelihood of bankruptcy.
Where have you heard about bank runs?
During the Great Depression there were many bank runs, causing banking crises. Certain states had laws that permitted the opening of only a single bank branch, so when customers decided to withdraw their capital, these lone branches ran out of money quickly.
What you need to know about bank runs.
Bank runs that happen to many banks at the same time are called banking panics and most of the recessions that have occurred in the United States have been because of them. Most developed countries use a system called fractional reserve banking, where only a tiny amount of money is reserved for demand deposits in cash. When this supply runs out it scares customers because they can't have immediate access to their money in cash. This then causes more customers to withdraw money from the bank, which in turn leaves the bank more unstable and increases the likelihood of bankruptcy.
Find out more about bank runs.
Find out how bank runs and banking panics have helped to cause recessions.