What are bank runs and why are they bad for the overall economy?
A bank run occurs when a large group of depositors withdraw their money from banks at the same time. Customers in bank runs typically withdraw money based on fears that the institution will become insolvent. With more people withdrawing money, banks will use up their cash reserves and can end up in default.
bank run. a phenomenon when many of a bank's depositors try to withdraw their funds at the same time due to fears of a bank failure.
A bank run is when a large number of a bank's customers hurry to withdraw their deposits simultaneously because they believe the bank may fail. A bank run may happen if bank officials state the institution is having financial difficulties or if such information is reported by news outlets or on social media.
A bank run occurs when depositors (that is, customers) attempt to withdraw their money (deposits) from a bank because they fear the institution will fail. Generally, a bank run occurs en masse. People will attempt to get their cash out at the same time before the bank becomes insolvent (i.e., collapses).
He also describes how a declining money supply influences employment, inflation/deflation and economic output. "That is the monetary explanation for the Great Depression. Bank failures, bank runs cause a contraction of the money supply; causes a decline in spending, investing and GDP." Video Player is loading.
When a bank run occurs, agents rush to the banks and withdraw their funds as quickly as possible. Banks are driven into bankruptcy due to liquidity problems. The breakdown of the banking industry distorts capital allocation and in most situations adds downward pressure to the real economy.
As explained above, banks are able to borrow short term and lend long term because, in normal times, not all deposits are withdrawn at the same time. A run occurs when depositors panic and try to withdraw their money simultaneously.
In 2008, Washington Mutual experienced a bank run in which depositors took out almost $17 billion over just two weeks. Factors included the failing housing market. Ultimately, the bank was purchased by JPMorgan Chase.
To prevent a bank run, the central bank guarantees that it will make short-term loans to banks, to ensure that, if they remain economically viable, they will always have enough liquidity to honor their deposits.
First, a bank can become fundamentally insolvent if asset values are less than the value of its liabilities. Second, uninsured depositors may run, causing the bank to fail. This is especially the case, because systemwide uninsured depositors make up about half of bank deposits (Egan et al.
What were bank runs and what a bank failure was?
If the failing bank cannot pay its depositors, a bank panic might ensue, causing depositors to withdraw their money from the bank (known as a bank run). This can make the situation worse for the failing bank by shrinking its liquid assets. When a bank's assets decrease, it has less money to lend to borrowers.
What was the problem that created bank runs? Banks did not have enough cash on hand for all its depositors, so people rushed to withdraw their money.
A brief history of bank runs
Before the Great Depression, bank runs—and more widespread financial panics—were fairly common. They were typically set off by a rapid change in the business cycle from boom and overconfidence to a return to reality and, ultimately, to fears of a crash.
Encouraging or organizing a "run on the banks" is typically considered illegal or at least highly unethical.
The primary source of income for banks is the difference between the interest charged from the borrowers and the interest paid to the depositors. Banks usually collect higher interest from loans than the interest they provide for deposits.
Banks can shrink the money supply by putting away more deposits as reserves at the central bank or by increasing their holdings of other forms of liquid assets—those that can be easily converted to cash with little impact on their price.
Banks can fail for many reasons, but generally they fall into a few broad categories: a run on deposits (which leaves the bank without the cash to pay everyone who wants to withdraw their money); too many bad loans or assets that fall precipitously in value (both of which erode the bank's capital reserves); or a ...
How Do Banks Drive the Economy? The banking sector is crucial to the modern economy. As the primary supplier of credit, it provides money for people to buy cars and homes and for businesses to buy equipment, expand their operations, and meet their payrolls.
A recent CNBC Select and Dynata Banking Behaviors Survey found that 40% of respondents who reported having withdrawn cash from their savings say they did so to cover fixed bills, such as a car payment. The second most cited reason, at 38%, was to cover variable expenses like groceries.
Some customers may believe a financial institution is in trouble and worry about losing money deposited there. This fear can then spread to other customers at that financial institution or other financial institutions, triggering a wave of withdrawal demands.
Why are bank failures contagious?
But panics may also occur be- cause runs on a few banks cause depositors at other banks to lose confidence and, therefore, to withdraw indiscriminately from both solvent and insolvent banks. These types of panics, which involve runs on a few banks spreading to otherwise solvent banks, are said to involve contagion.
When banks sought to protect themselves, they stopped lending money. Businesses couldn't get access to capital, and closed their doors, throwing millions of Americans out of work. Those unemployed Americans couldn't keep spending, and the toxic downward spiral continued.
The banks didn't have enough money in their safe so they stopped giving loans to farmers, business owners, etc. How did bank failures hurt Americans who needed to take out loans? Farmers didn't have enough money to make goods and for business owners to create more jobs & bring money into the economy.
On 9 March 2023, a US$42 billion bank run on Silicon Valley Bank led to the closure of the bank by California and United States regulators, with FDIC-insured deposits assumed by the Deposit Insurance National Bank of Santa Clara. This is currently the biggest bank run in history.
Silicon Valley Bank's customers withdrew $42 billion from their accounts on Thursday. That's $4.2 billion an hour, or more than $1 million per second for ten hours straight.
