Bank run

The classic wisdom about bank runs is that they are a self-fulfilling prophecy and a result of panic among depositors. The idea is that when people believe a bank is in trouble or insolvent, they rush to withdraw their money, which can lead to a "run" on the bank. This sudden surge in withdrawals can cause the bank to become illiquid, as it struggles to meet the withdrawal demands of its customers, which in turn can make the initial fears of insolvency a reality.

Classic wisdom suggests that bank runs can be prevented or managed through a combination of measures:

1. Deposit insurance: Governments often establish deposit insurance schemes to protect depositors' money up to a certain limit in the event of a bank failure. This helps to reassure depositors that their money is safe, reducing the likelihood of a run.
2. Central bank support: Central banks can act as a "lender of last resort" to provide liquidity to banks facing large-scale withdrawals. This support can help to stabilize the bank and restore confidence among depositors.
3. Transparency and communication: Clear, transparent communication from banks and regulators can help to alleviate depositors' fears and prevent rumors or misinformation from triggering a run.
4. Prudential regulation: Effective regulation and supervision of banks can ensure that they maintain adequate capital and liquidity levels, reducing the risk of insolvency and fostering depositor confidence.
5. Emergency measures: In extreme situations, authorities may impose temporary restrictions on withdrawals or facilitate a merger with a stronger bank to stabilize the situation and prevent a full-scale run.

The classic wisdom emphasizes the importance of confidence and trust in the stability of the banking system to prevent bank runs and the potential for systemic financial crises.

A saying about bank runs is credited to Walter Bagehot, a 19th-century British journalist and essayist, who wrote the seminal book "Lombard Street: A Description of the Money Market." He stated that during a financial crisis, a central bank should "lend freely, at a high rate, on good collateral."

This quote encapsulates the idea that central banks should act as a "lender of last resort" during a banking crisis to provide liquidity to struggling banks and help restore confidence in the financial system. By lending to banks with good collateral, the central bank can prevent insolvency and stop bank runs from escalating, ultimately preventing a broader financial crisis.