Definition
Bank Panic occurs when a large number of depositors simultaneously withdraw their funds due to fears that a bank may fail. This sudden rush can overwhelm a bank's liquidity, forcing it to sell assets at a loss or collapse entirely.
Why It Matters
Bank panics can trigger systemic financial crises, spreading fear to other banks and financial institutions. They reduce confidence in the banking system, disrupt credit flow, and may require government intervention or deposit insurance programs to stabilize the economy.
Example
During the Great Depression, widespread fears about bank solvency led to massive withdrawals, causing thousands of banks to fail. Modern regulations, such as the FDIC in the United States, are designed to prevent such panics by guaranteeing deposits and providing emergency liquidity.