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Run On The Bank

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A run on the bank occurs when customers/institutions panic and worry that their bank will go bankrupt, losing the funds they deposited. In a run on the bank situation, many customers will withdraw their savings, all within a very narrow time frame (i.e. a few days). Although at the beginning of a run on the bank, the bank may not have been insolvent, a run on the bank can precipitate the bank into bankruptcy. Indeed, as the run on the bank propagates with more and more customers/institutions losing confidence, at some point, the bank reserve is not able to meet all withdrawals requests and therefore, the bank becomes insolvent. During the great depression, a national run on the bank was characterized by customers physically lining up at their bank to withdraw their savings. With the availability of online transactions, a run on the bank can start with customers/institutions transferring funds to other banks or financial institutions they believe are less likely to default. Such run on the bank is called a silent run on the bank. A run on the bank can be mitigated by certain government actions (i.e. increase of FDIC deposit insurance limits, re-regulation of banks, increased reserve requirements, monetary bailout). A run on the bank is also called a bank run.



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