Bank run
Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 10, Ch 3 "Money and Credit"
Meaning
A bank run happens when many depositors fear that a bank may fail and all rush to withdraw their money at the same time. Banks keep only a fraction of deposits as cash and lend the rest. This is called fractional-reserve banking. So even a healthy bank cannot pay everyone at once. Panic can spread and cause the very failure people feared. This risk is why a lender of last resort (RBI) and deposit insurance exist.
Example
Class 10 asks: "What would happen if all the depositors went to ask for their money at the same time?" In the Class 12 story, Lala the goldsmith holds villagers' gold but has lent part of it to Ramu. If every villager asked for their gold on the same day, Lala could not return all of it.
Don't confuse with
- Insolvency: here a bank's assets are worth less than what it owes. In a run, even a solvent bank can fail simply because it runs short of cash.
Related concepts
- Credit creation
- Bank balance sheet
- Bank reserves
- Money multiplier
- Currency deposit ratio
- Reserve deposit ratio
- High-powered money
- Currency in circulation
- Money supply
- M1