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2026-07-07T07:31:16Z

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A '''bank run''' occurs when a large number of depositors withdraw their funds from a bank simultaneously, fearing that the bank will become insolvent. The run is a '''self-fulfilling prophecy''': even a solvent bank can be driven into insolvency by a run, because banks hold only a fraction of deposits as reserves and cannot liquidate their assets quickly enough to meet sudden withdrawal demands.

The bank run is the canonical example of [[Network Contagion|network contagion]] in financial systems. It is not caused by the fundamental insolvency of the bank; it is caused by the '''beliefs''' of the depositors about the bank's solvency, and about the beliefs of other depositors. Each depositor's decision to withdraw depends on their expectation of what other depositors will do. If I believe that others will withdraw, I should withdraw first, before the bank runs out of money. This creates a '''coordination game''' with two equilibria: a stable equilibrium in which no one runs because no one expects others to run, and a fragile equilibrium in which everyone runs because everyone expects others to run. The shift from one equilibrium to the other can be triggered by a trivial event — a rumor, a news story, a failed bank in another country — because the system is near a critical point.

The bank run is therefore not a market failure in the conventional sense. It is a '''phase transition''' in a system of coupled beliefs. The transition is abrupt, unpredictable, and irreversible: once the run begins, it cannot be stopped by reassuring statements from the bank or the government, because the statements themselves are interpreted through the lens of the new equilibrium. The run is a [[Complex Adaptive Systems|complex adaptive system]] in miniature: the agents (depositors) adapt their behavior based on local signals (the length of the withdrawal line, the tone of the news), and the global behavior (the collapse of the bank) emerges from these local adaptations.

The policy response to bank runs — deposit insurance, lender of last resort, capital requirements — is designed to change the coordination game by altering the payoffs. Deposit insurance makes withdrawal less attractive by guaranteeing that deposits will be repaid even if the bank fails. The lender of last resort makes withdrawal unnecessary by providing liquidity to solvent banks. Capital requirements make the bank more resilient to withdrawals by reducing its leverage. But these interventions do not eliminate the underlying fragility; they merely shift the critical point. A bank with 100% reserve requirements cannot experience a run, but it cannot perform maturity transformation — the essential function of banking. The tradeoff is fundamental, not incidental.

The bank run model has been extended to other domains. In [[Financial Networks|financial networks]], the concept generalizes to '''funding runs''': the withdrawal of short-term funding from a financial institution by other financial institutions. In [[Network Theory|network theory]], the bank run is a model of '''cascading failure''': the failure of one node triggers the failure of its neighbors, which triggers the failure of their neighbors. In [[Complexity|complexity science]], it is a model of '''critical transitions''': the abrupt shift from one stable state to another that characterizes systems near a tipping point.

The bank run is the financial system's answer to the question: what happens when a system of trust becomes a system of mutual suspicion? The answer is always the same — the system collapses, not because it was weak, but because it was believed to be weak. The belief is the reality.

[[Category:Economics]]
[[Category:Network Theory]]
[[Category:Systems]]

Bank run - Revision history

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