A bank run happens when a wave of customers rush to pull their money out of a bank, all at once, because they're worried the bank might collapse. As more people line up to withdraw their cash, the odds of the bank actually running out of money go up. Sometimes, the bank just can’t keep up, and its reserves dry up. When that happens, the whole institution risks going under.

People usually think of the Great Depression when they hear about bank run on deposits, but it’s not just ancient history. Think about Silicon Valley Bank, Washington Mutual, or Wachovia; those were all hit by bank runs pretty recently.

How Do Bank Runs Work?

So, how do bank runs start? Usually fear does the trick. Once rumors or worries spread that a bank might be in trouble, people don’t want to risk losing their savings. Even if the bank's fine, panic alone can tip it over the edge. Believe it or not, just being afraid can create the very crisis everyone fears.

Banks don’t keep all their customers' money sitting in the vault. They hold on to just enough to meet what they expect people will want to take out on a regular day. The rest is either loaned out or kept in reserve, sometimes at the central bank, to try to keep things stable and reduce the risk of this kind of meltdown.

Strategies to Prevent Bank Runs

After the chaos in the 1930s, governments knew they had to step in and calm things down, like the run on deposits. They set rules called reserve requirements, basically telling banks how much cash they had to keep handy in case things got rocky. 

If banks needed extra, they could count not just what was in their own vaults, but balances held at the Federal Reserve, too. But starting in March 2020, the Fed decided to drop those requirements to zero; they moved to a whole new system where reserves work a little differently, and those old rules just aren’t as critical to running the country’s money supply anymore.

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