∿ExploreSims
ExploreSims / Economics / Money & Banking / Bank Runs, Reserves & Liquidity
Premium experiment • withdrawals versus immediately available cash

ECONOMICS • MONEY & BANKING

Bank Runs, Reserves & Liquidity

Simulate a bank run with reserves, liquid assets and repeated withdrawals. See how liquidity can disappear even when the bank still has long-term assets on its balance sheet.

● BANK LIQUIDITY RUNdeposits → withdrawals → liquidity stress
Liquid resources
Deposits remaining
Withdrawals paid
Liquidity coverage

Reasoning inspector

live model state
Liquid resources—
Deposits remaining—
Withdrawals paid—
Coverage ratio—
Initial liquidity—
Liquidity status—

Experiment with the mechanism

Banks normally hold only part of deposits in immediately available liquid form. If many depositors demand cash quickly, the bank can face a liquidity problem before long-term assets can be converted to cash without loss.

LEARN WITH THE SIMULATION

Understand Bank Runs, Reserves & Liquidity by experimenting.

START HERE

A bank run is a rapid wave of withdrawals that tests whether a bank can turn assets into cash quickly enough. Banks transform short-term deposits into loans and other longer-term assets, so they normally do not hold every deposited unit as cash. This maturity transformation is useful, but it creates liquidity risk when many customers demand repayment at the same time.

BUILD THE IDEA

What you should understand first

  • Distinguish liquid reserves from total bank assets and understand why liquidity is about timing.
  • Trace how repeated withdrawals reduce both deposits and immediately available cash.
  • Explain why a bank can face liquidity stress even if its longer-term assets may still be valuable.

TRY IT YOURSELF

How do reserves and withdrawal speed interact during a bank run?

  1. Record initial liquid resources with the default reserve and liquid-asset ratios.
  2. Increase the withdrawal rate and replay the rounds.
  3. Reset, then raise the reserve ratio while keeping withdrawals high.
  4. Compare how many rounds remain covered before the next withdrawal demand exceeds available liquidity.
Read the visual:

Faster withdrawals consume liquid resources quickly. Higher reserves or other liquid assets provide a larger buffer, allowing the bank to meet more near-term withdrawals before liquidity stress appears.

WHY IT WORKS 01

Why banks do not keep every deposit as cash

If banks held every deposit entirely as idle cash, they could meet withdrawals easily but would perform much less financial intermediation. In normal banking, a portion of deposits helps fund loans and securities that support spending and investment. Because those assets mature later or may be costly to sell quickly, the bank keeps only a liquidity buffer for ordinary withdrawals.

WHY IT WORKS 02

Why confidence can change the problem very quickly

One depositor's withdrawal reduces the cash buffer available for everyone else. If customers believe others will withdraw first, they can have an incentive to join the run even when they would otherwise prefer to leave funds deposited. This coordination problem makes liquidity stress nonlinear in practice: fear of a shortage can accelerate withdrawals and help create the shortage people fear.

WHY IT WORKS 03

Why central banks and deposit insurance matter

Deposit insurance can reduce the incentive to rush for the exit because insured customers expect repayment even if the bank fails. A central bank can also lend against acceptable assets when a bank is fundamentally sound but temporarily short of cash. These institutions target the timing problem at the heart of liquidity crises, although they also create questions about risk taking, supervision and moral hazard.

DO NOT MIX THESE UP

Common misconception

Liquidity problems and insolvency are not the same thing. Insolvency means assets are worth less than liabilities overall. Illiquidity means cash is not available quickly enough to meet immediate obligations. The simulation focuses on liquidity and does not value the bank's loans, securities or capital in a complete balance sheet.

PRACTICE CHALLENGE

Can a bank have valuable long-term assets and still fail to meet tomorrow's withdrawals?

  • Set a low reserve ratio and modest other liquid assets.
  • Raise the withdrawal rate until liquidity stress appears quickly.
  • Remember that the simulation does not erase the bank's long-term assets when cash reaches a low level.
  • Explain why asset value and immediate cash availability are different balance-sheet questions.
Reveal the reasoning

Yes. A bank may own loans or securities whose long-run value is greater than the cash withdrawals arriving tomorrow, yet those assets may not mature in time or may be costly to sell immediately. The bank can therefore be economically solvent in a broad sense and still be unable to meet short-term payment demands without emergency borrowing, asset sales or outside support. That timing mismatch is the essence of liquidity risk.

MODEL BOUNDARIES

What this simulation assumes

Every simulation simplifies reality or a mathematical system. These are the assumptions and limits to keep in mind while interpreting the results.

Model assumptions

  • Deposits begin with a fixed share held as cash reserves and another share represented as immediately liquid assets.
  • Each round requests a fixed fraction of remaining deposits.
  • Long-term assets are not sold or valued during the run, so the model isolates liquidity rather than solvency.

Model limitations

  • Real banks have capital, wholesale funding, central-bank access, deposit insurance, asset sales and heterogeneous depositor behavior.
  • Withdrawal dynamics are stylized and do not model network contagion or endogenous confidence.

CONNECT IT

Where this matters

  • Commercial banking
  • Financial crises
  • Deposit insurance
  • Central-bank lender-of-last-resort policy

WORDS THAT MATTER

Key vocabulary

Bank run
A rapid wave of deposit withdrawals driven by customers seeking immediate repayment.
Liquidity
The ability to meet near-term cash obligations without costly delay.
Reserve ratio
The share of deposits represented here as immediately available cash reserves.
Maturity transformation
Funding longer-term assets with liabilities such as deposits that can be withdrawn sooner.