There are two main reasons why a bank run also named a run on the bank can occur. The first motive of a bank run happens in a fractional-reserve banking system (where banks normally only keep a small proportion of their assets as cash), a large number of customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvent. Motive number two that triggers a bank run is the general belief that a bank will be closed due to fraudulent or other irretrievable misbehavior.
As a bank run progresses, it generates its own momentum: as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy.
To combat a bank run, the bank, or its administrator may limit the cash amount each customer may withdraw, suspend withdrawals altogether, or promptly acquire more cash from other banks or from the central bank, besides other measures. Examples of such a limit to withdraw are seen with FBME Bank Cyprus and Banca Privada d’Andorra.
Several techniques have been used to try to prevent bank runs or mitigate their effects. They have included a higher reserve requirement (requiring banks to keep more of their reserves as cash), government bailouts of banks, supervision and regulation of commercial banks, the organization of central banks that act as a lender of last resort, the protection of deposit insurance systems such as the EU Deposit Guarantee Scheme, U.S. Federal Deposit Insurance Corporation or the Australian financial claims scheme, and after a run has started, a temporary suspension of withdrawals. These techniques do not always work: for example, even with deposit insurance, depositors may still be motivated by beliefs they may lack immediate access to deposits during a bank reorganization.
Often a bank run is accompanied by a bank panic, not to be confused with the situation where many banks suffer runs at the same time, as people suddenly try to convert their threatened deposits into cash or try to get out of their domestic banking system altogether. The lack of proper information, often because governmental bodies involved in the administration of the bank do not disclose their internal procedures, creates chaos under the banks customers and can boost negativity towards central banks and other controlling bodies. More than once, the public opinion was enforced by the banks management in an effort to pretend innocence.