Bank run

A bank run is a rapid withdrawal of deposits by many customers who fear a bank cannot meet its obligations. It can turn doubts about solvency into an immediate shortage of cash.

Fractional-reserve banking: A banking system in which banks hold only part of deposits as reserves and lend or invest the rest. Banks cannot normally pay every depositor at once because much of their funding is tied up in loans and assets.
Deposit insurance: A government-backed guarantee that reimburses depositors up to a specified limit if a bank fails. Credible protection reduces the incentive to withdraw deposits merely because others might do so.
Panic of 1907: A United States financial crisis in 1907 marked by bank runs, trust-company failures, and a severe credit contraction. The panic showed how withdrawals from lightly regulated trust companies could threaten the wider financial system.
Bank insolvency: A condition in which a bank’s liabilities exceed the value of its assets. A run is a withdrawal event; insolvency is a balance-sheet condition that may cause or follow one.
Credit crunch: A sharp reduction in the availability of loans to households and businesses. Banks protecting cash during runs may curtail lending, spreading financial stress to borrowers.
Maturity transformation: The practice of funding long-term assets with short-term liabilities. Deposits can be withdrawn quickly even when a bank’s loans and investments mature much later.
Lender of last resort: An institution, usually a central bank, that lends to financial institutions when other funding is unavailable. Emergency lending can supply cash to a solvent bank facing unusually heavy withdrawals.
Great Depression bank runs: Waves of bank failures and depositor withdrawals in the United States during the early 1930s. These runs helped prompt the creation of federal deposit insurance in the United States.
Bank panic: A widespread loss of confidence that prompts runs on multiple banks or disrupts the banking system. A single bank run can remain isolated, while a panic spreads withdrawal fears across institutions.
Contagion (finance): The spread of financial distress from one institution or market to others. A run can undermine confidence in banks with similar exposures or funding structures.

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