bank run
A bank run is when depositors rush to withdraw at once, and it can destroy a healthy bank simply because everybody feared it would.
In plain English
A bank does not keep your money in a vault. It lends most of it out. That is what a bank is.
Which means no bank on earth can repay every depositor at once. Not the weak ones and not the strong ones. The system rests on the reasonable assumption that everybody will not ask on the same morning.
A bank run is what happens when they do. A rumour spreads. People queue. Others see the queue and join it, because whatever the truth was yesterday, a bank that cannot pay today is finished. And so the fear makes itself true.
This is the cruel part. A perfectly solvent bank can be destroyed by a rumour, because the run does not test whether the bank was sound. It tests whether it can produce all the cash at once, and none can.
Nigeria has seen bank failures and consolidations, and the memory shapes behaviour to this day.
What protects you is deposit insurance. The NDIC covers your deposits at a licensed bank up to a limit, which is precisely why the limit is worth knowing and why holding a very large sum in one institution deserves a second thought.
A rumour spreads that a bank is in trouble. Depositors queue to withdraw. The bank cannot produce everybody's cash at once, because no bank can. The rumour is now true, and it was not true yesterday.
Questions people ask
Can a healthy bank fail in a run?
Yes. A run tests whether a bank can produce all its cash at once, and none can. Solvency and liquidity are different things.
What protects my deposits?
The NDIC insures deposits at licensed banks up to a limit per depositor per bank. Know the current limit, particularly if you hold large sums.
Should I spread money across banks?
If you hold more than the insured limit, it is worth considering. It costs nothing and it removes a risk you would otherwise be carrying for free.
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