What Triggers Them and How to Protect Your Money

A bank run happens when a large number of customers rush to withdraw their money because they fear the bank might fail. Since banks keep only a small portion of deposits in cash and use the rest for loans or investments, they can quickly run short on funds if too many withdrawals happen at once.

While not common today, bank runs can still happen during periods of financial stress, like when Silicon Valley Bank collapsed in 2023. Knowing what causes them and the steps you can take to protect your deposits can help you avoid losses if panic ever hits your bank.

What is a bank run?

A bank run happens when many customers withdraw their money at the same time because they fear the bank cannot meet its obligations. Since banks hold only a small portion of deposits in cash reserves, large withdrawals can quickly drain available funds. This can create a cycle of panic that accelerates the bank’s collapse.

Common Causes and Triggers of Bank Runs

Rumors, negative news, or concerns about a bank’s stability often spark bank runs. Even without actual financial trouble, fear alone can lead depositors to act. Reports of risky lending or poor management can erode confidence and push customers to withdraw their money.

Economic downturns or the failure of nearby banks can also trigger runs at otherwise healthy institutions. When Silicon Valley Bank failed in 2023, it became the second-largest bank collapse in U.S. history and set off similar withdrawals at other banks perceived to be at risk.

How the Banking System Works with Fractional Reserves

In the U.S., banks follow a fractional reserve system. They keep only a small share of deposits as reserves and use the rest for loans or investments, earning income from interest. This works smoothly when withdrawals are limited.

If too many customers demand their money at once, the bank may not have enough cash on hand. This shortage can quickly grow into a liquidity crisis, which is what makes banks vulnerable to runs.

See also: Cracking the Code: How Banks Generate Billions in Profits

The Domino Effect of Bank Runs

Once a bank run starts, it can escalate quickly. Initial withdrawals drain the bank’s cash reserves, sparking fear among other depositors who rush to take out their money. To meet demand, the bank may be forced to sell assets at a loss, deepening the crisis.

If the bank is large or heavily connected to other financial institutions, the panic can spread. This “contagion” can lead to runs at multiple banks, triggering broader financial instability.

Major Bank Runs in History and What They Taught Us

Bank runs have occurred in many countries and eras, often during periods of economic stress. Each one offers lessons about how quickly confidence can disappear and how governments respond to restore stability.

The Great Depression (1930s)

After the 1929 stock market crash, fear swept through the U.S. banking system. Depositors withdrew their money in droves, leading to the collapse of more than 9,000 banks by the end of the decade. The crisis prompted the creation of federal deposit insurance to restore public trust.

Bank of the United States (1930)

One of New York’s largest banks failed after a wave of rumors sparked massive withdrawals. The collapse worsened the financial panic and highlighted how a single failure can undermine confidence nationwide.

Hokkaido Takushoku Bank (1997)

During the Asian financial crisis, bad loans and market instability led depositors to pull their funds from this major Japanese bank. Its failure marked one of the largest bank collapses in the country’s history.

Northern Rock (2007)

In the UK, news that Northern Rock needed emergency central bank funding caused depositors to line up outside branches. It was the first major visible bank run in Britain in over a century.

Washington Mutual and the Silent Runs (2008)

Once considered stable, Washington Mutual collapsed after more than $16 billion was withdrawn in just 10 days. Many withdrawals happened digitally, making it impossible for the bank to recover once confidence eroded.

Cyprus Banking Crisis (2013)

Fears over the health of Cyprus’s banking sector led to heavy withdrawals and capital flight. Authorities imposed withdrawal limits and capital controls to stop the run, showing the role of government measures in containing panic.

The Impact of Bank Runs on the Economy

Bank runs affect both individual depositors and the wider economy. For individuals, a run can mean losing access to funds if the bank closes before withdrawals are processed. Deposit insurance, such as FDIC coverage in the U.S., protects up to $250,000 per depositor, per account type, but payments can take time during a bank failure.

On a broader scale, widespread bank runs can cause credit to tighten. Businesses and consumers may find it harder to borrow, reducing spending and investment. When this happens across multiple banks, the ripple effect can slow economic growth or push the economy into recession, as seen during the Great Depression.

How Banks and Regulators Prevent Bank Runs

Several safeguards exist to maintain public confidence and reduce the risk of bank runs.

• Deposit insurance protects up to $250,000 per depositor, per account type through the FDIC in the U.S., reassuring customers their funds are safe.
• Lender of last resort services from the Federal Reserve provide emergency funding to banks facing short-term liquidity problems.
• Regulatory oversight enforces capital requirements, risk controls, and transparency. The Dodd-Frank Act of 2010 strengthened many of these protections.
• Stress testing requires large banks to prove they could withstand severe financial shocks without failing.

How to Protect Your Money in a Bank Run

While bank runs are rare, taking steps now can reduce your risk and give you peace of mind if one occurs.

• Confirm FDIC coverage on your accounts to ensure up to $250,000 per depositor, per account type is protected.
• Spread deposits across multiple banks to stay within insurance limits. If your balances grow, check them regularly to make sure you remain fully covered.
• Consider credit unions insured by the National Credit Union Share Insurance Fund (NCUSIF) for the same level of protection.
• Keep some emergency cash at home or in a secure location so you have immediate access to funds if your bank temporarily closes.
• Look into low-risk alternatives such as Treasury bills or money market funds for holding larger sums while keeping them accessible.
• Monitor your bank’s financial health by reviewing quarterly statements and credible news reports for early signs of trouble.

Bottom Line

Bank runs are far less common today thanks to stronger regulations, federal deposit insurance, and the Federal Reserve’s role in stabilizing the system. Even so, they remain possible during periods of financial stress.

By keeping deposits insured, diversifying accounts, and paying attention to your bank’s stability, you can reduce the risk of losing access to your money if a run occurs.