What a Bank Run Actually Is and Why Capital Does Not Stop One
Two large banks failed in 2023 while meeting their regulatory capital requirements. The distinction between being solvent and being able to pay today is the whole subject.
What a Bank Is
A bank takes deposits, which are liabilities repayable on demand, and uses them to fund loans and securities, which are assets that mature over years. This transformation of short term liabilities into long term assets is the economic function of banking. It is not a flaw in the model, it is the model.
The consequence is that no bank holds enough cash to repay all depositors at once. None ever has, and none is designed to. That is the structural fact underneath every bank run in history.
Solvency Versus Liquidity
A bank is solvent when its assets exceed its liabilities. It is liquid when it can meet obligations as they come due. These are different conditions and a bank can satisfy one while failing the other.
An institution holding loans worth more than its deposits is solvent. If those loans cannot be converted to cash quickly, and depositors want cash today, it is illiquid. Illiquidity kills first, because obligations are dated and asset sales are not instantaneous.
Banks do not usually fail because the assets were bad. They fail because the money left faster than the assets could be turned into cash.
Why Selling Assets Makes It Worse
The mechanism that converts illiquidity into insolvency is forced sale. Banks classify some securities as held to maturity, which allows carrying them at cost rather than market value on the reasoning that they will be held until they pay off.
When rates rise, those securities are worth less than their carrying value. The loss is unrealized and disclosed in footnotes rather than in earnings. If deposit outflows force the bank to sell, the loss becomes real and immediately reduces capital. The act of raising cash destroys the solvency that was there beforehand.
This is exactly the sequence that killed Silicon Valley Bank, and it is why footnote disclosure of unrealized losses became the most read page in bank filings during 2023.
The Coordination Problem
Runs are also a game between depositors. If everyone stays, the bank survives and everyone is fine. If enough leave, the bank fails and late movers may lose access or take losses.
Given that structure, leaving early is rational for any individual even when staying collectively would be better. Depositors do not need to believe the bank is insolvent, only to believe that others might run. Deposit insurance exists to break this loop by removing the incentive to move first, which is why insured deposits are sticky and uninsured deposits are not.
What Changed in 2023
Two features made the 2023 runs faster than any in history. Deposits move by app in seconds rather than by queuing at a branch. And concentrated depositor networks, in that case venture backed startups sharing investors and group chats, coordinate information almost instantly.
A run that took weeks in the 1930s took roughly a day. Regulatory frameworks built around slower runs, including liquidity ratios calibrated to a thirty day stress, were designed for a speed that no longer applies.
The Bottom Line
A bank run is a liquidity failure that manufactures insolvency through forced sales. Capital ratios describe a position on a date. They say very little about whether the money can leave faster than the assets can be sold.