Bank Run

The bane of banks and Basel III

A bank run is a situation when the customers of a commercial bank all attempt to withdraw their deposits within a very short space of time due to a lack of confidence in the solvency of the bank. If, as is the case with most modern banks, the bank is operating as a fractional bank then the reserves held will not be enough to cover the deposits.

This will create a vicious cycle. The customers attempt to withdraw deposits because they think the bank will be unable to pay them if they wait, the bank is unable to fully pay them due to lack of accessible reserves, more customers panic and attempt to withdraw and then the bank is insolvent.

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