What Exactly Is a Bank Run ?

 A bank run occurs when a large number of a bank's customers withdraw their deposits all at once, fearing that the bank is insolvent and will be unable to repay their deposits.

This can occur if there are rumours or news of financial difficulties at the bank, such as large losses or bad loans, or if other banks or financial institutions fail.

A bank run can become a self-fulfilling prophecy because the sudden withdrawal of deposits can cause a liquidity crisis for the bank, making meeting all of its obligations difficult or impossible.

This, in turn, can cause more panic and more withdrawals, creating a downward spiral that can eventually lead to the bank's failure.

Governments and central banks frequently have deposit insurance schemes or lender-of-last-resort facilities that can provide liquidity to banks in times of crisis to prevent bank runs.

However, these precautions may not always be sufficient to prevent a bank run, especially if there is widespread distrust in the banking system as a whole.

A lender of last resort is a financial institution, typically a central bank, that makes loans to commercial banks or other financial institutions that are facing a liquidity crisis and are unable to obtain funding from other sources.

The lender of last resort is typically the "last resort" for a bank in need of liquidity, as it provides emergency funds to keep the bank from going bankrupt and potentially sparking a larger financial crisis.

A central bank, which has the authority to create money and lend it to banks in need, typically performs the lender-of-last-resort function.

The central bank can lend money to banks directly or through its discount window, which is a facility that allows banks to borrow money from the central bank in exchange for pledging eligible collateral.

In some cases, the central bank may provide additional liquidity support by purchasing assets from banks or guaranteeing their liabilities.

The lender-of-last-resort function is regarded as an important component of the financial system because it aids in the prevention of bank runs and other forms of financial instability.

The lender of last resort can help restore confidence in the banking system and prevent wider economic disruptions by providing emergency funding to banks.

It is important to note, however, that the lender-of-last-resort function is not a replacement for sound banking practices, and banks must still manage their risks and maintain adequate levels of capital and liquidity.