When the customers of a bank fear that the bank will become insolvent, a bank run occurs. The result of a bank run is that customers rush to the bank to take out their money as quickly as possible to avoid loss. When a large number of people withdraw their deposits, the likelihood of default increases. Initial withdrawal by a large number encourages further withdrawals. Such a withdrawal can cause bankruptcy.
Techniques adopted to prevent bank runs are:
- temporary suspension of withdrawals;
- the organization of central bank:
- the protection of deposit insurance system; and
- governmental bank regulations.