Bank Run Law and Legal Definition

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.