A bank run takes place when a large number of customers withdraw their money from a financial institution at the same time. This happens when there is concern over solvency.
Bank runs are possible due to the fractional reserve banking system we operate under. Here, deposits are loaned out on a long-term basis. This creates a situation where, if enough customers want their cash, the bank will not have enough reserves to cover the deposits.
The system operates on the premise that not everyone will want their money at the same time. For the most part, this is correct. However, there are point in history where runs did occur.
During the Great Depression, the Federal Deposit Insurance Corp (FDIC) was set up in the United States to alleviate this. At present, it insures up to $250,000 per account.
It is easy to see how the onset of a bank run can increase the risk of default, furthering the push for customers to get their money.
