There have been many terms tossed around lately stemming from the latest economic and financial news. One of the most popular has been the phrase “a run on the bank“.

What does that really mean?

A run on the bank is really a type of financial crisis that occurs when bank customers rush to withdraw their funds over fears that the bank may go under. Such as with Bear Stearns (BSC: chart, web, Y!), when word got out that they weren’t doing so hot, and you saw the mad rush to sell the stock, dropping the price per share from nearly $100 to under $2 in very short order (within a matter of months).

ON A SMALLER SCALE
Say for instance at your local bank down the street, the FDIC (essentially federal insurance guaranteeing your money) prevents a run on the bank. Think of it this way: your bank actually uses the funds they take in to lend to others. They pay you say 1% on your deposits, and turn around and lend your money to someone else for, say 5%. This is how banks make their money, and by in large, how larger public lending institutions make theirs as well.So if you no longer feel your money is safe in your bank, you with draw it. If all the customers of a bank do the same thing, the bank no longer has the funds to lend out, and hence no way to make that 5%.

ON A LARGER SCALE
Along those same lines, banks with a longer reach, as with publicly traded financial institutions (Bear Stearns for instance), a bank run can turn into a run away freight train if there is nothing to reassure customers their money is safe.In fact, if it is thought that the poor financial condition is not isolated to one institution, a bank run can spread to an entire sector. The down side of this is that the run can spark a recession, essentially because investors (or customers in a banks case) pull the very money out of a market that is used to actually stimulate that same market.

Tags: Bank Run | BSC | lending crisis | Wall Street Lingo

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