Idea
What happens if everyone withdraws their money at once?
Short answer
Banks cannot necessarily pay every depositor in cash immediately because many funds support longer-term loans. A wave of withdrawals can turn fear into a liquidity crisis, even at a bank with valuable assets.
Banks accept deposits, process payments and provide loans. A customer may be entitled to withdraw money under the account terms, but the bank cannot necessarily collect all its long-term loans on the same day. Imagine everyone in the neighbourhood arriving at the branch together. Rumours can trigger a bank run, and even a bank with valuable assets may be unable to raise cash quickly enough. This is a liquidity problem, which is not identical to insolvency. Walter Bagehot explored the role of emergency lending during panics. Modern regulation, deposit insurance, supervision and central-bank support aim to reduce the risk, without removing it. A harder question remains: how can society protect ordinary savers without encouraging bank managers to take excessive risks with other people’s money?
