What is a 'run' on a bank?

A run on a bank is when a large number of customers withdraw their funds simultaneously. If a run on a bank gains momentum it can quickly 'fail' or go out of business, as  happened with Lehman Brothers in 2008. This is what George (James Stewart) is trying to prevent in the famous scene (above) from 'It's a Wonderful Life'.

With institutions that are 'too big too fail' a government or international financial organisation may rescue the bank by either taking it over or injecting huge amounts of cash. This is the role the EU is currently playing in Cyprus.

Unfortunately the proposed solution, which involved seizing ten per cent of depositor cash has created a crisis of confidence that threatens the banks, the role of Cyprus in the EU and ultimately the EU project itself.

How do you stop a bank run?

With great difficulty. The traditional remedies are:
a) delay -  ....the bank is going to open again next week ...
the key requirement is to 'buy time' to organise refinancing. This means slowing down the rate at which customers can withdraw their funds.

At the end of the scene above George agrees to repay a customer 'in sixty days', a typical tactic during the 1930s in the US. Another was to send bank staff out to withdraw tiny amounts of cash, causing queues and again 'buying time'.

Unfortunately for today's troubled banks, withdrawals can now be carried out electronically. Bank managers cannot create queues in front of their clients computers.

b) Borrowing - there is always money available - at a price! The problems is the interest rate that will be charged on the loan. Private money markets are charging more than 6%  - which is unsustainable for anything over a very short period of time.

This only leaves the government or international financial institutions. That's why the Cypriot government has gone to to the EU for a bail out - but this then creates a bad example for other debtor countries.

c) insurance - ...he guarantees cash payments

By offering to guarantee all deposits banks or governments  dissuade customers from withdrawing their cash. This is the first step that George takes. Ireland did this in 2008 - but the bank debts proved to large and she ended  up having to go to the International Monetary Fund. The IMF - like the EU - will loan money to governments - but will also expect some control over the debtor nation's financial policies. This appears to be too high a price to pay as far as Cypriot politicians are concerned.

More on bank runs with excellent audio on the NPR Planet Money Podcast