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Definition of a Bank Run:
A bank run
occurs when many depositors simultaneously request to withdraw their deposits.
Imagine that you have most of your savings deposited at a local bank. You learn that the bank has run out of money and cannot service withdrawals. What would you do? If you are like many, you would run to the bank and demand all of your money. This describes a bank run. A bank run occurs when many depositors simultaneously request withdrawal of their deposits.
Listen to interviews and read about the impact of the Great Depression on banks at Living History - Great Depression
Image from Commons Wikimedia
Bank Run on American Union Bank April 26, 1932
Banks hold a small percentage of their deposits in cash. If reserves are inadequate, a bank may be compelled to sell some of its assets at below market prices. In severe cases, it may result in insolvency.
The health of the banking industry and economy depends on depositors being confident that their money is secure. Fortunately, safeguards have been implemented to guard against this happening in most countries. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account in member banks. The FDIC was established in 1933 following many bank runs during the Great Depression. Its primary objective was (and is) to maintain confidence in the US banking system.
One of the Federal Reserve Bank’s most important jobs is to prevent panics by acting as the lender of last resort. Banks can visit the Federal Reserve's discount window and borrow the money they need when they fear a bank run.
Dig Deeper With These Free Lessons:
Fractional Reserve Banking and The Creation of Money
Monetary Policy – The Power of an Interest Rate
Gross Domestic Product – The Power of an Interest Rate
Fiscal Policy – Managing An Economy By Taxing and Spending