The low down on bank runs

This week's biggest story continues to be the failure of Silicon Valley Bank and its fallout. But bank runs aren’t anything new. (Fans of “It’s A Wonderful Life” will remember one being a key plot point in that holiday classic.)

Bank runs happen when clients lose confidence in a financial institution and withdraw their money. As the bank starts to bleed deposits, it loses liquidity, and its default risk increases, leading more clients to panic and pull their deposits as a safety measure before the bank runs out of cash. 

  • Washington Mutual is the largest bank failure in American history. The bank was tied up in bad mortgages and had taken loans from near-insolvent institutions. 

  • Clients got nervous and pulled $16.9 billion of deposits over nine days in 2008, right in the middle of the global financial crisis.  

Yes, but: Bank runs can be a self-fulfilling prophecy. A bank may be perfectly healthy—until everyone decides they want their cash right now, leaving banks no time to sell off assets at a profit. 

Will we see a bank run in Canada? Probably not. The Canadian banking system is tightly regulated and dominated by a few large, national banks that are highly diversified. If any of the Big Five Canadian banks went under, you know things are really bad.

And it's important to remember that the Canadian Deposit Insurance Corporation (CDIC) covers deposits up to $100,000, so the money in your account is guaranteed up to that level.