A bank run happens when a significant number of customers withdraw their deposits from a bank at the same time, driven by concerns that the bank may become insolvent or fail. This panic-induced behavior can worsen the situation, leading to liquidity problems for the bank and potentially resulting in its downfall.

Several factors can lead to a bank run, including:

• Economic uncertainty: General economic instability or crises can create a lack of confidence in the banking system, prompting customers to withdraw their funds.
• Rumors or misinformation: Unverified rumors regarding a bank’s financial status can quickly circulate, inciting panic among customers and leading them to take out their money.
• Bank-specific issues: A bank may encounter particular difficulties, such as poor management or significant losses, which can diminish customer trust and trigger a bank run.
• Contagion effect: A bank run at one institution can sometimes affect other banks, especially if they share similar traits or if public confidence in the entire banking sector is low.

Bank runs can result in several consequences, such as:

• Liquidity issues: As customers withdraw their deposits en masse, banks may find it challenging to meet their obligations, leading to liquidity problems and potential insolvency.
• Credit crunch: Banks facing a run may need to limit their lending activities, resulting in decreased credit availability for businesses and individuals, which can hinder economic growth.
• Loss of confidence: Bank runs can erode public trust in the banking system, creating a negative feedback loop that further worsens the situation.
• Economic impact: Severe bank runs can lead to widespread financial instability and have long-lasting effects on the economy, as witnessed during the Great Depression and the 2008 financial crisis.

Regulatory authorities play a vital role in preventing and managing bank runs through various measures, including:

• Deposit insurance: Many countries implement deposit insurance schemes that safeguard depositors’ funds up to a certain limit, reducing the motivation for customers to engage in a bank run.
• Lender of last resort: Central banks can serve as a lender of last resort, providing emergency liquidity to banks experiencing a run, thereby helping to stabilize the situation.
• Prudential regulation: Regulatory authorities oversee banks’ financial health and enforce capital adequacy and liquidity requirements to ensure that banks can endure financial shocks and maintain customer confidence.
• Transparency and disclosure: Ensuring that banks provide accurate and timely information about their financial status can help prevent misinformation and rumors from inciting bank runs.