bank run

A bank run occurs when a large number of a bank's customers withdraw their deposits simultaneously due to fears that the bank will become insolvent. This can quickly drain the bank's reserves, potentially leading to its collapse. Here are three examples to help explain this concept:

1. The Great Depression (1929) in the United States

During the Great Depression, the stock market crash of 1929 led to widespread economic panic. Many people feared that banks would run out of money, so they rushed to withdraw their savings. The sudden surge in withdrawals caused many banks to fail, as they didn't have enough liquid assets to meet all the demands. This, in turn, worsened the economic crisis, leading to further bank failures and deepening the depression.

2. Northern Rock (2007) in the United Kingdom

In 2007, during the early stages of the global financial crisis, the British bank Northern Rock experienced severe liquidity problems due to its reliance on short-term borrowing from the wholesale markets. When news spread that the bank had sought emergency financial support from the Bank of England, customers panicked and started withdrawing their deposits in large numbers. This bank run was one of the first in the UK in over 150 years. The government eventually had to step in to nationalize Northern Rock to prevent a complete collapse.

3. 2013 Cyprus Financial Crisis

In 2013, Cyprus faced a severe financial crisis, and the government proposed a levy on bank deposits as part of a bailout plan from the European Union. This proposal led to widespread panic, and many Cypriots rushed to withdraw their money from banks, fearing their savings would be confiscated. The banks were closed for several days to prevent a full-scale bank run. When they reopened, strict capital controls were imposed to limit the amount of money that could be withdrawn or transferred abroad.

These examples show how quickly fear can spread and cause a bank run, leading to serious financial instability. To prevent such situations, banks and governments often implement measures like deposit insurance, capital controls, and emergency funding mechanisms.