Instruction: What is a bank run?

Response: To understand a bank run you have to first understand how a bank works. Banks take deposits from customers and agree to return the deposits at any time. However instead of charging a fee for storing the money, banks make a profit by investing the deposits, either by lending then out to businesses that need loans or by buying safe investments like treasuries.

The problem is that these investments typically are somewhat illiquid. So if a customer suddenly asks for their deposits back, the bank can’t immediately sell its investments to give it to them. To counter this, banks keep a pool of money on hand to handle day to day deposits and withdrawals.

However, if every customer wants to withdraw their deposits at once, the bank does not have enough money to give to every customer. This is a bank run.