A bank run occurs when a large number of customers look to withdraw their deposits in unison due to concerns about the bank’s health (solvency) and its long-term future. When customers transfer funds from their account to a separate institution this can be termed as flight of capital. As these withdrawals increase, it tends to create a snowball effect and the probability of the bank defaulting increases. These situations can destabilise the bank such that they can run out of cash and ultimately face bankruptcy. As a result, banks may limit the amount of cash that can be withdrawn by a customer to help control this movement.
In the past decade, we have seen bank runs across the world. For example:-
- Northern Rock (United Kingdom)
- Countrywide Financial (United States)
- Landsbanki (Iceland)