A bank run occurs when several depositors at one bank suddenly take their money, often because they don’t trust the bank to honour their withdrawal requests. This may cause a bank to close its doors because it is unable to keep up with consumer demand. The rapid drying up of cash flow, known as a “bank run,” may have devastating effects on the economy and spread instability across the financial system.
The Great Depression era in the United States is often regarded as the most illustrious instance of a bank run in history. Because of the “bank holiday,” dozens of banks had to close throughout the nation due to clients desperately trying to get their money out. President Roosevelt ordered a “bank holiday” and shuttered all banks for several days out of worry that a major financial collapse was spreading throughout the United States. Even though the Federal Reserve injected emergency cash into several banks at this time, the economic impact was considerable.
However, bank runs are very uncommon in Canada. Canada’s deposit protection and more stringent banking regulations have kept the country safe from catastrophic bank runs. The increased regulation of the banking industry in Canada has prevented the kind of reckless behaviour that might trigger a financial crisis.
The absence of control and the prevalence of huge, complicated financial institutions in the United States raise the probability of a bank run. These financial institutions are often highly leveraged, which means they have borrowed a lot of money and invested it in high-risk assets. There is a risk of a bank run if consumers panic at these times and pull their money out of the bank.
Large depositors in the United States may feel less at danger of losing their money if the bank collapses since the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per bank. The vast size of many US banks, coupled with this guarantee, increases the potential for a bank run.
On the other hand, bank runs have been avoided because to Canada’s more cautious approach to banking regulation and deposit insurance. Canada also has a tiny banking industry, which mitigates the potential for a bank run to produce widespread economic instability. Canada also has a more strictly regulated banking industry, with the Bank of Canada keeping an eye on financial institutions. This stringent oversight promotes sound banking practises and reduces the potential for a bank run.
As a result of factors such as a bigger and more complicated banking system, a lack of regulation, and deposit protection provided by the FDIC, bank runs are more common in the United States than in Canada. On the other hand, bank runs have been avoided because to Canada’s more cautious approach to banking regulation and deposit insurance.