A bank run occurs when many depositors try to withdraw funds at the same time because they fear the bank may fail.
Why runs happen
Banks hold only part of deposits in liquid form and invest the rest in loans or longer-term assets. That structure is normally efficient, but it means confidence matters. If enough depositors expect trouble, their withdrawals can make the trouble real.
The economic mechanism
Runs are a coordination problem. Each depositor may prefer to wait if others remain calm, but once enough people rush for the exit, early withdrawal becomes individually rational even if the bank would have survived otherwise.
Why economists care
Bank runs matter because they can turn liquidity stress into broader financial crises. That is why deposit insurance, lender-of-last-resort facilities, and regulation are all designed in part to prevent panic from becoming systemic collapse.
Knowledge Check
### A bank run happens when:
- [x] many depositors withdraw at once because they fear insolvency or illiquidity
- [ ] a bank raises lending rates
- [ ] a central bank lowers inflation
- [ ] a government balances its budget
> **Explanation:** The key feature is panic withdrawal driven by fear about the bank's ability to repay.
### Why are bank runs a coordination problem?
- [x] Because each depositor's best action depends on what others are expected to do
- [ ] Because all depositors have identical contracts with no uncertainty
- [ ] Because runs occur only after bankruptcy is finalized
- [ ] Because deposit insurance eliminates expectations
> **Explanation:** Withdrawals can become self-fulfilling when confidence collapses collectively.
### Which policy is most directly intended to reduce run risk?
- [x] Deposit insurance
- [ ] Barter exchange
- [ ] Average-cost pricing
- [ ] Tax avoidance
> **Explanation:** Protecting depositors reduces the incentive to rush to withdraw first.