Bank run

A bank run is a rush by many of a bank's depositors to withdraw their money at the same time, out of fear that the bank will fail. Because a bank lends out much of the money deposited with it, a large enough run can force it to fail even if the fear began as a rumour.

When runs spread from one bank to many, the result is called a banking panic.

How a run works

A bank takes in deposits that customers can withdraw whenever they like and lends the money out for longer periods, to homebuyers, businesses and other borrowers. The bank's liabilities (what it owes depositors) therefore have a short maturity, while its assets (the loans) have a long one. Economists call this maturity transformation, and the Royal Swedish Academy of Sciences' popular summary of the 2022 economics prize describes it as the way banks create liquidity: savers can treat their deposits as money while borrowers keep long-term financing.

The same arrangement makes a bank fragile. The Academy's summary explains that a rumour that more savers are about to withdraw than the bank can cope with can send depositors rushing to withdraw, "regardless of whether this rumour is true". To pay them, the bank must call in loans early and sell assets quickly at low "fire sale" prices, and the resulting losses may cause it to collapse (Nobel Prize). A depositor who expects others to withdraw has good reason to withdraw first, which is why a run can feed on itself.

The Diamond–Dybvig model

The standard theoretical account is a 1983 paper by the economists Douglas Diamond and Philip Dybvig, "Bank Runs, Deposit Insurance, and Liquidity", published in the Journal of Political Economy (vol. 91, no. 3, pp. 401–19) and reprinted by the Federal Reserve Bank of Minneapolis in 2000. Its abstract states that ordinary demand-deposit contracts "have multiple equilibria, one of which is a bank run". In other words, the same bank with the same assets can end up either in a calm state, where only depositors who need cash withdraw, or in a run, where everyone withdraws because everyone expects everyone else to.

The paper makes two further claims that shaped later policy. First, bank runs "cause real economic damage, rather than simply reflecting other problems". Second, there are circumstances in which "government provision of deposit insurance can produce superior contracts" (Diamond and Dybvig, via the Minneapolis Fed). The Academy's summary adds the logic: if depositors know the state guarantees their money, they no longer need to rush to withdraw at the first rumour, so in theory a deposit insurance scheme that is believed never needs to be used (Nobel Prize).

In 2022 Diamond, Dybvig and Ben Bernanke shared the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel "for research on banks and financial crises" (Nobel Prize press release).

Runs and the wider economy

Bernanke's contribution, also from 1983, was historical. According to the Academy's summary, the number of American banks halved in the three years after the downturn turned into a banking crisis in 1930, in many cases because of runs. Before Bernanke's work, the usual view was that the banking crisis was a consequence of the declining economy; he argued that bank failures were themselves decisive in turning a recession into a deep and prolonged depression. A failed bank takes with it what it knew about its borrowers, knowledge that cannot simply be handed to another lender, so credit dries up and recovery takes years.

History

The Panic of 1907

The Panic of 1907 shows a run spreading through institutions outside the banking core. According to Jon R. Moen and Ellis W. Tallman, writing for the Federal Reserve History project, New York's trust companies competed with banks for deposits but held cash reserves of around 5 percent of deposits, compared with 25 percent for national banks, while their deposits could still be withdrawn in cash on demand. After a failed attempt to corner the stock of United Copper in October 1907, runs hit the banks linked to the speculators involved and then spread to the trusts. Knickerbocker Trust suspended operations on 22 October after depositors had withdrawn nearly $8 million. On 26 October the New York Clearing House banks restricted the conversion of deposits into cash.

Moen and Tallman write that the panic spurred the reform movement that led to the creation of the Federal Reserve System (Federal Reserve History).

The banking panics of 1930–33

In November 1930 the collapse of Caldwell and Company, a Nashville-based financial holding company, set off a cascade of failures through networks of correspondent banks, the larger banks with which smaller banks kept their reserves. In Gary Richardson's account for Federal Reserve History, depositors in towns where banks closed "panicked and withdrew funds en masse from other banks", panic spread from town to town, and within a few weeks hundreds of banks had suspended operations. On 11 December the Bank of United States, the fourth-largest bank in New York City, closed after depositors rushed to withdraw. A further wave began in Chicago in June 1931.

Richardson notes that the regional Federal Reserve Banks responded differently. The Atlanta Fed expedited lending and rushed funds to towns hit by panics; the St. Louis Fed restricted lending and refused to help banks outside the Federal Reserve System. Economic contraction slowed in the Atlanta district, while hundreds of banks failed in the St. Louis district (Federal Reserve History). He also describes how the panics shrank the money supply, as the public hoarded cash and bankers built up reserves instead of lending.

A further wave of panic in early 1933 led state after state to declare bank holidays, and in March 1933 President Franklin Roosevelt proclaimed a nationwide one. In his first "fireside chat", on 12 March 1933, announcing the end of the holiday, Roosevelt told Americans that there was "an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people", as quoted in the FDIC's A Brief History of Deposit Insurance in the United States. The same history records that some 4,000 banks that had closed earlier in 1933 or during the holiday never reopened, and that more than 9,000 banks failed in the four years before 1934.

Silicon Valley Bank, 2023

The run on Silicon Valley Bank (SVB) in March 2023 was unusually fast. The Federal Reserve's own review of its supervision of the bank, dated 28 April 2023, reports that SVB lost over $40 billion in deposits on 9 March and that management expected to lose over $100 billion more on 10 March, together roughly 85 percent of its deposit base, an outflow the review calls "remarkable in terms of scale and scope". By comparison, the review cites estimates that Wachovia lost about $10 billion over 8 days in 2008 and Washington Mutual $19 billion over 16 days. California regulators closed SVB on the morning of 10 March 2023.

The review points to two features of the case. About 94 percent of SVB's deposits were uninsured at the end of 2022, and its depositors were a concentrated network of venture capital investors and technology firms who withdrew "in a coordinated manner" fuelled by social media. Michael S. Barr, the Fed's Vice Chair for Supervision at the time, wrote in the covering letter that social media, a concentrated depositor base and technology "may have fundamentally changed the speed of bank runs" (Federal Reserve, 2023).

Defences against runs

Lender of last resort

A central bank can stop a run by lending cash to a bank against its sound but slow-to-sell assets, so that it can pay depositors without a fire sale. The classic statement is by the nineteenth-century English writer Walter Bagehot in Lombard Street: A Description of the Money Market. Bagehot argued that in a panic such loans "should only be made at a very high rate of interest", as "a heavy fine on unreasonable timidity", and that at that rate they "should be made on all good banking securities, and as largely as the public ask for them". The purpose, he wrote, "is to stay alarm".

Deposit insurance

Deposit insurance promises depositors that they will be repaid up to a limit even if their bank fails, which removes the reason for an insured depositor to run. In the United States, New York adopted an early form of bank-obligation insurance in 1829, and several states ran deposit-guaranty schemes in the early twentieth century (FDIC). The federal scheme was created by the Banking Act of 1933, which Roosevelt signed on 16 June 1933, and took effect on 1 January 1934 with coverage of $2,500 per depositor. The FDIC's history records that only nine banks failed in 1934 (FDIC). As of November 2026 the standard coverage is $250,000 per depositor, per insured bank, for each account ownership category (FDIC, "Deposit Insurance At A Glance").

Suspending withdrawals

A bank or group of banks can also halt a run by temporarily restricting withdrawals, as the New York Clearing House banks did on 26 October 1907 when they restricted the conversion of deposits into cash. Moen and Tallman note that this broke the one-for-one exchange between deposits and cash, so that cash traded at a premium (Federal Reserve History).

Criticism and debate

Deposit insurance has been controversial from the start. According to the FDIC's history, Roosevelt, the Secretary of the Treasury and the chairman of the Senate Banking Committee all opposed a federal plan before 1933, believing it "would be unduly expensive and would unfairly subsidize poorly managed banks"; public opinion carried it through Congress. The same history, written in 1998, lists later objections: that deposit insurance has meant too few bank failures, that it "undermines market discipline" (depositors who are protected have less reason to watch how their bank is run), that the coverage limit was too high, and that it amounts to a federal subsidy for banks. It concludes that each concern "may be valid to some extent".

The SVB case showed the other side of the limit. Because insurance covers only deposits up to a ceiling, a bank funded mainly by large uninsured deposits remains exposed to the kind of run the insurance was meant to prevent (Federal Reserve, 2023).

Beyond banks

The same mechanism can affect institutions that are not legally banks but that, like banks, owe money payable on demand while holding assets that cannot quickly be sold at full value. Moen and Tallman compare the trust companies of 1907 with the "shadow banks" of the 2007–09 financial crisis, such as investment banks funded by short-term lending from hedge funds and money market mutual funds, institutions without direct access to the Federal Reserve (Federal Reserve History).

Sources

• Royal Swedish Academy of Sciences, "The laureates explained the central role of banks in financial crises", popular science background, Prize in Economic Sciences 2022, NobelPrize.org, October 2022.
• Royal Swedish Academy of Sciences, press release, Prize in Economic Sciences 2022, NobelPrize.org, 10 October 2022.
• Douglas W. Diamond and Philip H. Dybvig, "Bank Runs, Deposit Insurance, and Liquidity", Journal of Political Economy 91, no. 3 (June 1983): 401–19; reprinted in Federal Reserve Bank of Minneapolis Quarterly Review (Winter 2000).
• Jon R. Moen and Ellis W. Tallman, "The Panic of 1907", Federal Reserve History, Federal Reserve System.
• Gary Richardson, "Banking Panics of 1930–31", Federal Reserve History, Federal Reserve System.
• Federal Deposit Insurance Corporation, A Brief History of Deposit Insurance in the United States, FDIC, September 1998.
• Federal Deposit Insurance Corporation, "Deposit Insurance At A Glance", accessed November 2026.
• Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, 28 April 2023.
• Walter Bagehot, Lombard Street: A Description of the Money Market, Project Gutenberg eBook #4359.