What Is a Bank Run?

Bank Run Definition

A bank run happens when rumors of insecurity spark worry and doubt in customers who hold deposits in a bank. The bank’s customers come to believe that the bank is financially insecure and that they will lose their money when the bank collapses, and so a great number of people try to withdraw their money at the same time.

A bank that’s experiencing a run can’t fulfill all the withdrawal requests from their customers. Banks lend out the money that’s deposited in accounts and use the interest they receive from those loans to pay interest on savings accounts and CDs. 

Therefore, banks don’t have enough money in their reserves to give all their customers the full value of their accounts. And the more people who withdraw their money, the less banks have to give to customers who come after. This accelerates the problem of the bank run, as customers rush to get their money out of the bank while they still can.

Thus, bank runs can become a self-fulfilling prophecy; even if the bank was stable when the run began, enough people losing confidence and withdrawing their money can put the bank’s financial stability in real jeopardy.

Historical Examples of Bank Runs

In the last 100 years, a few significant bank runs have had major impacts on the national and global economy. Some of the most famous examples of bank runs occurred during times of great financial crisis, such as the Great Depression of the 1930s and the more recent Great Recession of 2008-2009.

Historic Bank Runs

2023: Silicon Valley Bank and Signature Bank

In March of 2023, two banks that were heavily invested in tech startups and exposed to crypto experienced bank runs. Silicon Valley Bank and Signature Bank became the second and third largest bank failures in American history. On March 9, customers at Silicon Valley Bank withdrew $42 billion, leaving the bank with a negative cash balance.

2008: Washington Mutual

From 2008 through 2015, over 500 banks failed during and following one of the worst economic downturns in American history. One of those banks, Washington Mutual, experienced the largest bank run at that time since the Great Depression. During the Washington Mutual run, customers withdrew $16.7 billion in just nine days.

1930: Bank of United States

The 1929 stock market crash precipitated a string of bank failures and runs that catapulted the country’s economy into the Great Depression. One of the biggest failures of this period was the Bank of United States, which, at the time, was the fourth-largest bank in New York City.

1873: Jay Cooke & Company

One of the earliest bank runs in American history, the Panic of 1873, was caused in part by widespread speculation in the railroad industry. Due to overexposure in railway bonds, JCC declared bankruptcy on September 18, 1873, prompting a run that spread to multiple banks across the country.

The Impact of Bank Runs

A bank run can have significant impacts on the financial health of the bank in question and that of the entire economy. The consequences of bank runs for the economy as a whole include loss of confidence, instability in the banking system and credit contraction.

As previously mentioned, a run on a healthy bank can cause that bank to collapse if not properly mitigated. The loss of confidence in one bank can spread to other institutions, creating a domino effect where more and more banks fail as a result of too many depositors withdrawing their funds at once.

Credit contraction is another consequence of bank runs, as Doug Carey, CFA, founder and president of WealthTrace, told Annuity.org. “When banks experience runs, they may have to sell assets or reduce lending to meet the demand for withdrawals,” Carey said. “This can cause a contraction in credit, making it harder for businesses and households to obtain loans to finance their activities.” 

According to Carey, the fallout of a bank run could also mean that the average person might have less access to loans at a bank due to reduced credit availability. Banks might also increase their fees or loan interest rates in response to a run, Carey said.

If the institution you bank with experiences a run, you could stand to lose some of your savings, though likely not all of it, thanks to FDIC insurance. 

How To Avoid or Mitigate the Impact of a Bank Run

The best way to protect your cash savings from a bank run is to ensure that you are fully covered by FDIC insurance. The FDIC protects deposits at insured banks and savings associations for up to $250,000 per depositor per bank.

Thus, most average bank customers won’t have to worry about their personal financial stability if their bank experiences a run. Provided you have less than $250,000 in the bank, the FDIC will take care of your deposits by either transferring them to a healthy bank or by directly paying them out within a few business days.

If you have more than $250,000 you want to be insured, you have a few options. You could open a joint account at the same bank since deposit insurance is calculated per depositor, per bank. A joint account would bring your insured total up to $500,000 and $250,000 insured for the co-owner of the joint account.

For any remaining savings, your best option may be to diversify your holdings. This could mean moving some of your money to a different bank entirely. You might also consider investing the money instead of keeping it all in a bank account.

Frequently Asked Questions About Bank Runs

Editor Malori Malone contributed to this article.