Liquidity is not solvency
A bank may own assets worth more than its debts yet be unable to turn them into cash quickly without a large loss. That is a liquidity problem. If its assets are worth less than its liabilities, the problem is insolvency. During a panic, distinguishing the two in real time is difficult.
Deposits payable on demand offer convenient payments while bank loans are repaid over years. This maturity transformation finances households and firms but creates vulnerability: an ordinary bank does not hold all of its long-term loans in cash at once.
How a bank run takes hold
If a depositor expects everybody else to withdraw and the bank to close, withdrawing first may be rational—even if the bank could have survived without the panic. Fast withdrawals force asset sales, depress prices and may validate the fear. Distrust and payment links can spread one institution's problem.
The Panic of 1907 in the United States featured a systemic flight from deposits and helped drive the debate that produced the Federal Reserve. Between 1930 and 1933, further regional and national waves of bank failures struck during the Great Depression.
- cash withdrawals reduce a bank's immediate liquidity
- forced sales can turn a temporary problem into a loss
- bank links and common fear can spread contagion
Two protections—and their limits
A lender of last resort can lend to a solvent bank against suitable collateral when markets temporarily will not. The aim is to buy time and avoid fire sales, not to hide missing assets. Poorly designed support can shield owners from bad decisions and encourage more risk.
Deposit insurance promises eligible depositors repayment up to a stated limit, reducing the reason to race to the counter. The US FDIC was created by legislation in 1933 after thousands of bank failures. Coverage has rules and limits; its credibility depends on funding, supervision and the ability to resolve failed banks.
Bitcoin removes an issuer, not every run
Self-custodied bitcoin has no bank that must redeem the promised unit. The holder still needs a key, a functioning network and the ability to pay a fee. Its market price can drop sharply, but that is not a run on an issuer with insufficient reserves.
An exchange, lender or custodian may receive bitcoin and give the customer only a contractual account balance. If it relends assets or mismatches maturities, it can face the same rush of withdrawals. The word bitcoin alone neither removes counterparty risk nor creates deposit insurance.