What is a bank panic? How does it occur? How can it affect even otherwise healthy banks?

What is a bank panic? How does it occur? How can it affect even otherwise healthy banks? 

Ans. When some bank fails and unable to keep its commitments towards depositors.

In such a situation, depositors lose faith in banks and start withdrawing their moneys even from other banks. Such distrust on banking system is called bank panic. It occurs when depositors withdraw more than what banks had expected. It can affect many healthy banks as well. Banks operate on a fractional reserve system. Therefore, banks actually do not have enough cash to honour the demands of depositors if all came together. Therefore, the entire banking system may fail if such a system develops. Majority deposits of banks are demand deposits which increases the risk. Banks may try to come out of it by selling assets but it is neither feasible for large amounts nor advisable. Fall in prices of securities in which bank has invested may also lead the bank to fail.