Bank Run

Examples of Bank Run in the following topics:

• The Glass Steagall Banking Act

  • A bank run is depositors discover their bank has financial trouble, so everyone runs to the bank to withdraw their deposits.
  • Then the rumor triggers a bank run.
  • Bank runs can lead to contagion.
  • Contagion is a bank run on one bank leads to bank runs on other banks.
  • Friends and family run to their banks to withdraw funds from their accounts, triggering more bank runs.

• Causes of Banking Crises

  • Banking crises can be caused by inadequate governmental oversight, bank runs, positive feedback loops in the market and contagion.
  • Banking crises are when there are widespread bank runs: an abnormal number depositors try to withdraw their deposits because they don't trust that the bank will have the deposits for withdrawal in the future.
  • Bank Run: A bank occurs when many people try to withdraw their deposits at the same time.
  • The Great Depression highlights how bank runs caused a banking crisis, which ultimately became a global economic crisis.The Great Depression in 1929 resulted from a variety of complex inputs, but the turning point came in the form of a mass stock market crash (Black Tuesday) and subsequent bank runs.
  • Describe some common causes of a banking crisis, Explain a bank run

• Banking and Finance Reform

  • At the beginning of the Great Depression, the economy was destabilized by bank failures, brought on by bank runs.
  • Bank runs occurred when a large number of customers withdrew their deposits because they believed the bank might become insolvent.
  • Much of the Great Depression's economic damage was caused directly by bank runs.
  • Roosevelt declared a bank holiday, suspending all bank operations in order to prevent bank runs.
  • Previous president Herbert Hoover had considered a bank holiday to prevent further bank runs, but rejected the idea because he was afraid it would only incite incite further panic.

• Answers to Chapter 2 Questions

  • Bank deposits are liquid.
  • The FDIC liquidates a bank's assets and refunds the deposits to the depositors, or the FDIC finds another bank to merge with the failed bank.
  • A bank run is depositors show up at their bank at once and demand their deposits back.
  • A contagion is one bank run leads to other bank runs, even for financially healthy banks.
  • First, a bank acquires stock in another bank, allowing it to cross a state line.

• Chapter Questions

  • Appraise the difference between a state bank and a national bank.
  • Identify the two methods the FDIC uses to handle a bank failure.
  • Identify methods a bank holding company uses to circumvent government regulations.
  • How does a nonbank bank and automated teller machines circumvent bank regulations?

• Reasons for Maintaining Cash on Hand

  • For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand), whereas reserves and loans are its primary assets (in the sense that these loans are owed to the bank, not by the bank).
  • Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks, borrowing from a central bank, such as the U.S.
  • Federal Reserve Bank, and raising additional capital.
  • In severe cases, this may result in a bank run.
  • Most banks are subject to legally mandated requirements intended to help banks avoid a liquidity crisis.

• Reserve Requirement

  • If the Fed believes banks are holding too many excess reserves, then banks would create high inflation in the future.
  • Thus, reserve requirements would not prevent bank runs and does not stabilize the banking system.
  • Only deposit insurance can help prevent bank runs.
  • Milton Friedman, a Nobel laureate, suggested the central bank should impose a 100% reserve requirement on banks.
  • Banks link savers to the investors.

• Consequences of Banking Crises

  • Banking crises have a range of short-term and long-term repercussions, domestically and globally, that reduce economic output and growth.
  • Banking crises have a range of short-term and long-term repercussions, domestically and globally, that underline the severe repercussions of irresponsible banking practices, poor governmental regulation, and bank runs.
  • The most useful way to frame the consequences of bank crises is by observing the critical role banks play in economic growth, primarily through investment and lending.
  • Within a given system, banking failures create a range of negative repercussions from an economic perspective.
  • Banks also perform more poorly, due to the fact that they have less capital to invest and returns to acquire.

• The Structure and Function of Other Banks

  • Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior.
  • The banks borrow cash, and when the repo notes come due the participating banks bid again.
  • The Executive Board is responsible for implementing monetary policy and the day-to-day running of the bank.
  • The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based.
  • Summarize the structure of the ECB, the Bank of England, and the People's Bank of China

• Why the U.S. Government Created Federal Reserve System

  • They converted a large private bank into a central bank.
  • For example, Great Britain established the Bank of England in 1694, and France founded the Bank of France in 1800.
  • A Fed bank prevents financial panics by being a source of liquidity or emergency loans for banks during an economic crisis.
  • The New York Stock Exchange plummeted nearly 50% while many banks teetered on bankruptcy as people began bank runs.
  • It provides emergency loans to banks and helps restore confidence in the banking system.