The conceptual foundation for understanding bank runs and systemic liquidity vulnerability is modeled by economists through the classic Diamond-Dybvig Model.

The Diamond-Dybvig model explains that banks perform a vital economic function by engaging in Maturity Transformation—funding long-term, illiquid assets (such as mortgages and corporate project credit) using short-term, liquid liabilities (such as customer demand deposits).

[Commercial Banking Infrastructure]
  |- Assets (Mortgages / Credit Lines) -> Long-term maturities; highly illiquid
  |- Liabilities (Demand Deposits) ------> Short-term maturities; instant withdrawal access

This structural mismatch makes the banking sector vulnerable to self-fulfilling panics. If depositors suspect a bank is facing insolvency, they have an incentive to withdraw their funds immediately. Because the bank’s assets are locked in long-term loans, it cannot liquidate them instantly to satisfy all claims, transforming a psychological panic into a real insolvency crisis.