====== Bank Run ======
A bank run is a terrifying financial spectacle where a large number of a bank's customers, gripped by panic, rush to withdraw their deposits all at once. The panic stems from the fear that the bank is, or is about to become, [[insolvent]]—meaning its liabilities exceed its assets. This mass withdrawal becomes a self-fulfilling prophecy. Modern banks operate under a [[fractional-reserve banking]] system, where they keep only a small fraction of deposits as cash on hand. The rest is lent out as mortgages or business loans. This is great for the economy, but it means a bank can never pay all its depositors at the same time. If a rumor spreads that "Bank X is in trouble," early birds might get their cash, but the news of long lines and dwindling funds causes panic to snowball. The bank, unable to meet the overwhelming demand for cash, is forced to collapse, even if its loans and investments were perfectly sound. It's a classic case of fear, not fundamentals, causing a failure.
===== How a Bank Run Unfolds =====
Imagine a small town's only bank. One day, a rumor starts—perhaps the bank made a bad loan to a failing local factory. A few nervous depositors decide to pull their money out, just in case. Others see them and get worried. The line at the teller window grows. In the age of social media, a picture of that line could go viral in minutes, creating a digital stampede. This chain reaction is a textbook example of [[financial contagion]].
To meet the withdrawal demands, the bank first uses its cash reserves. When that runs out, it's forced into a "fire sale," desperately selling its assets—like bonds and loans—to raise cash. Selling assets in a panic means accepting rock-bottom prices, which can cripple the bank's [[balance sheet]]. This process can turn a previously healthy, solvent bank into an actually insolvent one. The bank that was merely short on ready cash ([[liquidity]]) now has its assets' value permanently destroyed, leading to its ultimate failure.
===== Modern Safeguards Against Bank Runs =====
Thankfully, we no longer live in the era of //It's a Wonderful Life//. Governments and regulators have built robust defenses to prevent bank runs from happening, or at least to contain the damage.
==== Deposit Insurance ====
This is the most powerful shield. In the United States, the [[Federal Deposit Insurance Corporation (FDIC)]] insures individual deposits up to $250,000 per depositor, per bank. Most European countries have similar protections under the [[Deposit Guarantee Schemes Directive (DGSD)]], which guarantees deposits up to €100,000. This insurance removes the primary incentive to run; since your money is guaranteed by the government, you don't need to be first in line to get it back.
==== The Lender of Last Resort ====
If a bank is solvent but facing a temporary cash shortage, the nation's [[central bank]] can step in. Institutions like the U.S. [[Federal Reserve]] or the [[European Central Bank (ECB)]] can act as a "lender of last resort," providing emergency loans to the troubled bank through a facility often called the [[discount window]]. This injection of cash can help a bank weather the storm without having to resort to a disastrous fire sale of its assets.
==== Regulation and Supervision ====
Regulators work behind the scenes to make banks more resilient. They enforce strict rules, including:
  * [[Capital requirements]]: Mandating that banks fund themselves with a minimum amount of their own capital, creating a buffer to absorb losses.
  * [[Liquidity coverage ratios]]: Requiring banks to hold a certain amount of high-quality, easily sellable assets to survive a 30-day stress scenario.
===== A Value Investor's Perspective =====
For a value investor, the phenomenon of a bank run offers several key lessons. While your deposits are generally safe, your investments in bank stocks are not.
First, a bank's greatest asset is confidence, which doesn't appear on a balance sheet. A bank run is a stark reminder that fear can trump fundamentals. When evaluating a bank, a savvy investor must look beyond the numbers and assess the stability of its deposit base, the quality of its management, and its reputation. Look for banks with a high [[capital adequacy ratio]] and a conservative lending history—a financial fortress that can withstand a storm.
Second, widespread panic in the banking sector can create rare opportunities. During a crisis, the market often sells off //all// bank stocks indiscriminately—the good, the bad, and the ugly. This is where a discerning investor, as [[Warren Buffett]] famously advises, can be "greedy when others are fearful." Buffett's own profitable investment in [[Goldman Sachs]] during the 2008 financial crisis is a legendary example. However, this is an area for experts only. It is incredibly difficult for an outsider to distinguish a temporarily illiquid bank from a permanently insolvent one in the heat of a crisis. For most value investors, the best takeaway is to stick with exceptionally high-quality banks or to simply watch the drama from the sidelines.