The best way to understand Run on the Bank is through the example of Signature Bank this week. A run on the bank is a very rare event, and a live example helps us understand it.
As you know, a bank takes money from depositors and gives it to borrowers. It always has enough money to pay to depositors who come to take their money.
But suppose a rumour spreads in the market that a certain bank is about to fail. Obviously, depositors want their money as quickly as possible. In this case, a lot of people who have deposited money with the bank want to withdraw their money as quickly as possible. The bank doesn’t have that much cash. So, it is not able to meet the withdrawal requests and people think that this is a sign of the bank failing.
This action is called a run on the bank – when a lot of people run to the bank to withdraw their money.
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