Financial Crises: Explanations, Types, and Implications; by Stijn Claessens and M. Ayhan Kose; imf working Paper 13/28; January 1, 2013

History of banks runs 

 

Runs have occurred in many countries throughout history. In the U.S., bank runs were 

common during the banking panics of the 1800s and in the early 1900s (during the Great 

Depression). Only with the introduction of deposit insurance in 1933, did most runs stop in 

the U.S. (Calomiris and Gorton, 1998). Wide-spread runs also happened frequently in 

emerging markets and developing countries in recent decades, such as in Indonesia during 

the 1997 Asian financial crisis. Runs occurred more rarely in other advanced countries, and 

even less so in recent decades, in part due to the wide spread availability of deposit 

insurance.

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 Yet, Northern Rock, a bank specializing in housing finance in the U.K., 

constitutes a very recent example of a bank run in an advanced country (Shin, 2011). Rapid 

withdrawals of wholesale market funding also took place during the recent financial crisis, 

when several investment and some commercial banks faced large liquidity demands from 

investors.  

 

Widespread runs can also take place in non-bank financial markets. For example, in the U.S. 

during the fall of 2008, some mutual funds “broke the buck”, i.e., their net asset value fell 

below par. This triggered sharp outflows from individual investors and many other mutual 

                                                 

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 Ranciere and Tornell (2011) model how financial innovations can allow institutions to maximize a 

systemic bailout guarantee, and report evidence supporting this mechanism in the context of the 2007 

US financial crisis.  

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 Deposit insurance, first introduced in the U.S. in 1933, was adopted following the World War II by 

many advanced countries, and has since employed by developing countries (Demirguc-Kunt, Kane 

and Laeven, 2008). While deposit insurance can reduce the risk of bank runs, it can have severe 

negative side effects, including increased moral hazard, leading to more risk taking. 

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funds (Wermers, 2012). This “run”, in turn, led the government to provide a guarantee 

against further declines. These guarantees constitute a continued source of fiscal risk as the 

government might be forced to step in to prevent a run again. Other investment vehicles 

specializing in specific asset classes (such as emerging markets) also experienced sharp 

outflows as there was a general “flight to safety” (i.e., more demand for advanced countries’ 

government bonds and T-bills). More generally, the 2007-08 crisis has been interpreted by 

many as a widespread liquidity run (Gorton, 2009).