What is a bank run and why do they happen?

A bank run is a large number of depositors withdrawing money simultaneously because they fear the bank will fail — and the crucial feature is that the fear can cause the failure regardless of whether it was justified.

Why banks are vulnerable by design. A bank takes deposits repayable on demand and lends them out for years — mortgages, business loans. This is maturity transformation, and it is a genuinely useful economic function. But it means a bank never holds enough liquid cash to repay all depositors at once, and no solvent bank ever does.

So a bank that is entirely healthy can be destroyed by enough people wanting their money at the same time. Its assets are real but illiquid, and selling them quickly means selling at a loss — a fire sale — which can convert a liquidity problem into genuine insolvency.

The self-fulfilling nature. Because the first depositors to withdraw are repaid in full and later ones may not be, it is individually rational to withdraw if you believe others will — even if you think the bank is sound. This makes a run a coordination problem with two possible outcomes, and rumour alone can tip it.

What changed with technology. The 2023 failure of Silicon Valley Bank demonstrated a modern version: concerns spread through social media and messaging groups among a concentrated, well-connected depositor base, and withdrawals were executed instantly through apps. Tens of billions were withdrawn in a day. Classic bank runs took days of queueing; this took hours.

What prevents them:

Deposit insurance — the FSCS in the UK, FDIC in the US — is the primary defence. If your money is guaranteed, you have no reason to queue, which removes the incentive that drives the run.

Central banks as lender of last resort, providing liquidity against sound collateral.

Liquidity requirements and stress testing.

Bank holidays and suspension powers, historically used to break panic.

Keep balances within protection limits across separate banking licences.