What is a 'bank run'? How does it accelerate the spread of a crisis?

Hello, I'll try to explain this in simple terms.

What is a "Bank Run"?

Simply put, a "bank run" is when a large number of people, fearing a bank's collapse, frantically rush to the bank simultaneously to withdraw all their deposits.

You can imagine it this way:

There's a small convenience store in your neighborhood. The owner is nice, and everyone likes to "deposit" their spare change with him, deducting it directly when they buy things. Very convenient, right?

The owner of this convenience store doesn't keep everyone's money in the drawer. He takes a large portion of it to the wholesale market to stock up on goods, like many cases of cola, instant noodles, etc. He only keeps a small amount of cash in his drawer to cover daily small expenses like cigarettes or bottled water. This is a normal business model.

Banks operate on the same principle. When we deposit money into a bank, the bank doesn't keep all depositors' money piled up in a vault. It lends out most of it, for example, to businesses for operations or to individuals for buying homes and cars. The bank only keeps a small portion of money (called "reserves") to meet our daily withdrawal needs.

Okay, now for the crucial part.

One day, a loudspeaker in the neighborhood suddenly announces: "The convenience store owner lost all his money gambling, he's almost broke!"

Regardless of whether this news is true or false, what would you think upon hearing it? "Oh no, I still have 200 yuan with him. What if he really runs out of money? My money would be gone! I need to get it back quickly!"

So you rush to the convenience store. Your neighbors hear about it and, with the same thought, rush over too. Instantly, the convenience store is swarmed, everyone extending their hands, saying: "Owner, give me back my deposited money!"

The owner opens the drawer, and there might only be a few thousand yuan in cash, enough for you and a few others, but nowhere near enough for everyone. Even if he immediately sold all the cola and instant noodles in the warehouse, it would take time! But people can't wait, and the scene becomes increasingly panicked.

Finally, the convenience store can't produce the money and has to close down. Even if he hadn't actually lost all his money, but just temporarily didn't have enough cash, because everyone rushed to demand their money, he truly "collapsed."

This is a "bank run." It is essentially a crisis of trust triggered by panic. What banks fear most is not a lack of money (assets), but a temporary inability to produce enough cash (liquidity), and a bank run precisely attacks this most vulnerable point of a bank.

How Does It Accelerate the Spread of a Crisis?

The terrifying thing about a bank run is its extreme contagiousness, like a virus.

1. Contagion of Panic (Psychological Aspect)

Continuing with the convenience store example. The convenience store in your neighborhood collapsed due to a run.

Zhang San from the next neighborhood hears about this and starts to wonder: "This convenience store in our neighborhood, it seems to be a chain with theirs, right? Could it also have problems? No, to be safe, I need to withdraw my 300 yuan too."

So, Zhang San also rushes to the convenience store in his neighborhood to withdraw money. As soon as he moves, others in the next neighborhood see him and also panic: "Look, Zhang San is withdrawing money, something must be wrong!" Thus, a run also occurs at the second convenience store.

You see, even though the second convenience store had no problems, the collapse of the first one triggered widespread distrust, causing it to suffer as well.

It's the same in the banking system. When a bank (say, Bank A) experiences a run, depositors immediately start to suspect: "Is Bank B, which has business dealings with Bank A, in danger? My money is in Bank C, which seems about the same size as Bank A, could it also be unsafe?" Once this chain of suspicion forms, people will "rather believe it than not," rushing to withdraw money from other healthy banks to "play it safe," and thus the run spreads from one point to a wide area.

2. Contagion of Risk (Financial Aspect)

Banks are not isolated; they have a complex "social circle" where lending to each other is very common.

For example, Bank A collapses due to a run. But it might have borrowed 1 billion from Bank B previously and hasn't repaid it. Now that Bank A has collapsed, that 1 billion is very likely unrecoverable.

Bank B suddenly loses 1 billion, and its financial situation deteriorates instantly. When this news gets out, Bank B's depositors start to panic and also rush to Bank B for a run.

Moreover, when a crisis occurs, all banks become extremely cautious. They stop lending to each other, all wanting to hold onto cash just in case. This causes the "blood" (funds) of the entire financial market to coagulate. Even businesses that were originally healthy but just temporarily needed some money for turnover can't borrow, and they might collapse as a result.

So you see, the process by which a bank run accelerates the spread of a crisis is:

One bank has a problem → Depositors panic → A bank run occurs → Panic spreads to depositors of other banks → Other banks also experience runs → Simultaneously, interbank debt problems are exposed, healthy banks are dragged down → The entire banking system distrusts each other and stops lending → The financial market paralyzes → Ultimately affecting all industries, triggering a full-blown economic crisis.

A small fire, because everyone runs in one direction, trampling each other, ultimately creates a huge disaster that engulfs everyone. This is the power of a bank run.