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Encyclopedia > Bank run
A poster for the 1896 Broadway melodrama The War of Wealth depicts a typical 19th century bank panic in the U.S.
A poster for the 1896 Broadway melodrama The War of Wealth depicts a typical 19th century bank panic in the U.S.
A modern-day bank run, this one on a British bank
A modern-day bank run, this one on a British bank

A bank run (also known as a run on the bank) is a type of financial crisis. It is a panic which occurs when a large number of customers of a bank withdraw their deposits because they fear it is, or might become, insolvent. This action can destabilize the bank to the point where it becomes insolvent. Banks retain only a fraction of their deposits as cash (see fractional-reserve banking): the remainder is invested in securities and loans. No bank has enough reserves on hand to cope with more than the fraction of deposits being taken out at once. As a result, the bank faces bankruptcy, and will 'call in' the loans it has offered. This can cause the bank's debtors to face bankruptcy themselves, if the loan is invested in a plant or other items that cannot easily be sold. Image File history File links Download high resolution version (1024x776, 132 KB) Summary Poster for the War of Wealth by Charles Turner Dazey, a play that opened February 10, 1896. ... Image File history File links Download high resolution version (1024x776, 132 KB) Summary Poster for the War of Wealth by Charles Turner Dazey, a play that opened February 10, 1896. ... Poster for The Perils of Pauline (1914). ... A financial crisis hello is a situation when money demand quickly rises relative to money supply. ... Panic is the primal urge to run and hide in the face of imminent danger. ... For other uses, see Bank (disambiguation). ... A deposit account is an account at a banking institution that allows money to be held on behalf of the account holder. ... Insolvency is a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities (commonly referred to as balance-sheet insolvency) or when the person or entity can no longer meet its debt obligations when they come due (commonly referred to as cash-flow... Fractional-reserve banking refers to a financial system in which some fraction of the deposits can be used to finance profitable but illiquid investments. ... For other uses, see Loan (disambiguation). ... Reserves are banks holding of deposits in accounts with their national bank (for instance, the Federal Reserve), plus currency that is physically held by banks (vault cash). ... Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration—see text) in the United Kingdom. ...


A banking panic or bank panic occurs if many banks suffer runs at the same time. The resulting chain of bankruptcies can cause a long economic recession. A recession is usually defined in macroeconomics as a fall of a countrys Gross National Product in two successive quarters. ...


As a bank run progresses, it generates its own momentum. As more people withdraw their deposits, the likelihood of default increases, so other individuals have more incentive to withdraw their own deposits. A bank run is a kind of positive feedback loop which has much in common with the reflexive processes described by George Soros, amongst others. Another example of a reflexive process is economic bubble. Positive feedback is a mechanism by which an output is enhanced. ... Soros redirects here. ... bubbles are things that you make out of soap. ...

Contents

Theory

Main article: Diamond-Dybvig model

Diamond and Dybvig[1] developed a widely used model to explain why bank runs occur and why banks issue deposits that are more liquid than their assets. This model starts with illiquid assets such as store inventories, which cannot be sold immediately without taking a substantial loss. Investors holding illiquid assets sometimes need access to liquid assets (for example to fund an entrepreneurial project that must be started quickly), but are hampered by not being able to predict when these opportunities arise. A bank can invest in a set of illiquid assets; the deposits in the bank become a more liquid asset that allows investors to share the risk of losses due to early liquidation. If only a few depositors withdraw at any given time, this works well; if not, the bank (as opposed to the original investors) may have liquidity problems, and depositors will rush to withdraw their deposits, forcing the bank to liquidate its assets at a loss, and eventually to fail. When such a bank calls in its loans early, this forces borrowers to disrupt their production, causing further economic problems.[2] Market liquidity is a business, economics or investment term that refers to an assets ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. ...


A bank run can occur even when started by a false story. Even depositors who know the story is false will have an incentive to withdraw, if they think other depositors will believe the story. The story becomes a self-fulfilling prophecy.[2] A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true. ...


Prevention

Several techniques can be used to help prevent bank runs.


Individual banks

Some prevention techniques apply to individual banks, independently of the rest of the economy.

  • A bank can take deposits from depositors who do not observe common information that might spark a run. For example, in the days before deposit insurance, it made sense for a bank to have a large lobby and fast service, to prevent a line of depositors from extending out into the street, causing passers-by to infer that a bank run is occuring.[2]
  • A bank can temporarily suspend withdrawals to stop a run. In many cases the threat of suspension prevents the run, which means the threat need not be carried out.[2]

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system. ... It has been suggested that this article or section be merged with Reserve requirements. ... Fractional-reserve banking refers to a financial system in which some fraction of the deposits can be used to finance profitable but illiquid investments. ... Economic policy Monetary policy Central bank   Money supply Gold standard Fiscal policy Spending   Deficit   Debt Policy-mix Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Regulation Banking Fractional-reserve Full-reserve   Free banking Islamic        Full-reserve banking is the banking practice in which the...

Collective prevention

Some prevention techniques apply across the whole economy, though they may still allow individual institutions to fail. These techniques create moral hazard, since they reduce incentives for banks to avoid making risky loans; the goal is for the benefits of collective prevention to outweigh the costs of excessive risk-taking.[4] Moral hazard refers to the prospect that a party insulated from risk (such as through insurance) will not fully account for the negative consequences of the risk when deciding to act. ...

  • Central banks act as a lender of last resort. 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.[2]

A central bank is an entity responsible for monetary policy of its country (or in the case of the EU, group of member countries). ... This article needs to be cleaned up to conform to a higher standard of quality. ... Explicit Deposit insurance is a measure introduced by policy makers in many countries to protect deposits, in full or in part, in the event of a run on a bank or banks. ... The FDIC logo The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. ...

History

The run on the Montreal City and District Savings Bank. The Mayor addressing the crowd. Printed in 1872 in the Canadian Illustrated News.

Bank runs first appeared as part of cycles of credit expansion and its subsequent contraction. In the 16th century onwards, English goldsmiths issuing promissory notes suffered severe failures due to bad harvests plummeting parts of the country into famine and unrest. Other examples are the Dutch Tulip manias (1634-1637), the British South Sea Bubble (1717-1719), the French Mississippi Company (1717-1720), the "Post Napoleonic Depression" (1815-1830) and the Great Depression (1929-1939). Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... The Laurentian Bank of Canada (Banque Laurentienne du Canada) TSX: LB is a Schedule I bank in the province of Quebec. ... The Canadian Illustrated News was a weekly Canadian illustrated magazine published in Montreal from 1869-1883. ... Pamphlet from the Dutch tulipomania, printed in 1637 The term tulip mania (alternatively tulipomania) is used metaphorically to refer to any large economic bubble. ... Hogarthian image of the South Sea Bubble, by Edward Matthew Ward, Tate Gallery The South Sea Company (1711 – c1850s) was an English company granted a monopoly to trade with South America under a treaty with Spain. ... For the later land company, see Mississippi Land Company. ... For other uses, see The Great Depression (disambiguation). ...


Bank runs have also been used to blackmail individuals or governments; for example in 1830 when the British Government under the Duke of Wellington overturned a majority government under the orders of the king, George IV, to prevent reform (the later 1832 Reform Act), he angered reformers and so a run on the banks was threatened under the rallying cry "To stop the Duke go for gold!". Italic text His Grace Field Marshal the Most Noble Arthur Wellesley, 1st Duke of Wellington, KG, GCB, GCH, PC, FRS (c. ... George IV redirects here. ... The British Reform Act of 1832 (2 & 3 Will. ...


Many of the recessions in the United States were caused by banking panics. The Great Depression contained several banking crises consisting of runs on multiple banks from 1929 to 1933; some of these were specific to regions of the U.S.[5] Much of the Depression's economic damage was caused directly by bank runs,[6] and institutions put into place after the Depression have prevented runs on U.S. commercial banks since the 1930s,[1] even under conditions such as the U.S. savings and loan crisis of the 1980s and 1990s.[7] The Depression's bank runs left a lasting mark on the American psyche, exhibited in sometimes disturbing images such as the bleak scenes where the fictional hero George Bailey contemplates suicide in the movie It's a Wonderful Life.[8] The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States in which over 1,000 savings and loan institutions failed in the largest and costliest venture in public misfeasance, malfeasance and larceny of all time. ... For other uses, see Its a Wonderful Life (disambiguation). ...


Recent incidents

In 2001, during the Argentine economic crisis (1999-2002), a bank run and corralito was experienced in Argentina. There are various theories into the cause.[9] This contributed towards the bank runs in neighbouring Uruguay during the 2002 Uruguay banking crisis. The Argentine economic crisis was part of the situation that affected Argentinas economy during the late 1990s and early 2000s. ... Corralito was the informal name for the economic measures taken in Argentina during 2001 by economy minister Domingo Cavallo in order to stop the draining of bank accounts. ... The Uruguay Banking Crisis was a major banking crisis that hit Uruguay in July 2002 in which a massive run on banks by depositors caused the government to freeze banking operations. ...


From 9 November to 12 November 2006, Nepal Bangladesh Bank Limited (NB bank) in Nepal suffered a bank run. On 8 November 2006, a Nepalese newspaper reported that NB Bank's 13 billion Nepalese rupees was at severe risk due to misuse of deposits by bank management. This news caused a run on the bank. Depositors withdrew around 3 billion Nepalese rupees during the three days of the run. However, after the takeover of bank management by the central bank of Nepal, the run ended.[citation needed] is the 313th day of the year (314th in leap years) in the Gregorian calendar. ... is the 316th day of the year (317th in leap years) in the Gregorian calendar. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... is the 312th day of the year (313th in leap years) in the Gregorian calendar. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... ISO 4217 Code NPR User(s) Nepal Inflation 7. ...


In early August 2007, the American firm, Countrywide Financial suffered a bank run as a consequence of the subprime mortgage crisis.[10] Motto: (traditional) In God We Trust (official, 1956–present) Anthem: The Star-Spangled Banner Capital Washington, D.C. Largest city New York City Official language(s) None at the federal level; English de facto Government Federal Republic  - President George W. Bush (R)  - Vice President Dick Cheney (R) Independence - Declared - Recognized... Countrywide Financial Corporation (NYSE: CFC) is a diversified financial marketing and service holding company engaged primarily in residential mortgage banking and related businesses. ... The subprime mortgage crisis is an ongoing problem manifesting itself through liquidity issues in the banking system which have become more prevalent due to foreclosures which accelerated in the United States in late 2006 and triggered a global financial crisis during 2007 and 2008. ...

Northern Rock bank run on the morning of 14 September 2007.
Northern Rock bank run on the morning of 14 September 2007.

On 13 September 2007, the British bank Northern Rock arranged an emergency loan facility from the Bank of England, which it claimed was the result of short-term liquidity problems. The bank's defenders claimed its cash shortage was the result of over-exposure to the failing US sub-prime mortgage market, while its critics argued that it was the result of NR's own careless lending practices. A run began the following day, Friday, with reports of its internet banking site being overloaded,[11] and long queues outside branches that day, Saturday morning and the following Monday.[12] News reports on 17 September stated that an estimated £2 billion GBP of retail deposits had been withdrawn by customers since the bank had applied for emergency funds. [13] Image File history File links Metadata Size of this preview: 800 × 600 pixelsFull resolution (2048 × 1536 pixel, file size: 373 KB, MIME type: image/jpeg) File historyClick on a date/time to view the file as it appeared at that time. ... Image File history File links Metadata Size of this preview: 800 × 600 pixelsFull resolution (2048 × 1536 pixel, file size: 373 KB, MIME type: image/jpeg) File historyClick on a date/time to view the file as it appeared at that time. ... is the 257th day of the year (258th in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 256th day of the year (257th in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... Northern Rock plc is a British bank, currently owned by the UK government. ... Headquarters Coordinates , , Governor Mervyn King Central Bank of United Kingdom Currency Pound sterling ISO 4217 Code GBP Base borrowing rate 5. ... GBP may be: short for Game Boy Player the ISO currency code for the British Pound Sterling. ...


On Tuesday, 11 March 2008, a bank run began on the securities and banking firm Bear Stearns. While Bear Stearns was not an ordinary deposit-taking bank, it had financed huge long-term investments by selling short-maturity bonds (Asset Backed Commercial Paper), making it vulnerable to panic on the part of its bondholders. Credit officers of rival firms began to say that Bear Stearns would not be able to make good on its obligations. Within two days, Bear Stearns's capital base of $17 billion had dwindled to $2 billion in cash, and Bear Stearns told government officials that it saw little option other than to file for bankruptcy the next day. By 07:00 Friday, the Federal Reserve decided to lend Bear Stearns money, the first time since the Great Depression that it had lent to a nonbank. Stocks sank, and that day JPMorgan Chase began an effort to buy Bear Stearns as part of a government-sponsored bailout. The deal was arranged by Sunday in an effort to calm markets before markets opened Monday.[14] is the 70th day of the year (71st in leap years) in the Gregorian calendar. ... 2008 (MMVIII) is the current year, a leap year that started on Tuesday of the Anno Domini/Common Era, in accordance with the Gregorian calendar. ... The Bear Stearns Companies, Inc. ... For other uses, see The Great Depression (disambiguation). ... -1...


In Fiction

In The Count of Monte Cristo the protagonist Edmond Dantes, in disguise as the fabulously wealthy Count of Monte Cristo, takes revenge on Danglars by withdrawing huge sums of money under a letter of credit from another bank which gives "unlimited credit". This, combined with rumours of insolvency, leads to the bank's collapse and disgrace for its founder Danglars.


In James Clavell's novel, Tai-Pan, a bank run nearly bankrupts the protagonist, Dirk Struan, and forms the basis of many events in the book.


In the Tom Swift series the eponymous hero uses his technology to stop a run on the bank.


In the 1964 film Mary Poppins, the Banks children accidentally cause a bank run at their father's bank.


In one of the pivotal scenes of the film It's a Wonderful Life, the hero George Bailey saves his building and loan association from a run by using the money from his wedding trousseau to supply cash to his panicked depositors.


In Arthur Hailey's 1975 novel The Money Changers, the hero narrowly prevents a bank run from bankrupting his bank after the revelation of a major fraud.


In the episode "The PTA Disbands" of The Simpsons, Bart Simpson causes a bank run by inserting rumors about the bank's insolvency. This causes a Jimmy Stewart-like bank manager to say "I don't have your money here. It's at Bill's house and Fred's house!" referring to the bank run on It's a Wonderful Life.


In The Jungle, by Upton Sinclair, rumours of a bank run cause the character Marija to withdraw her savings. Later, it turns out that "the cause of the panic had been the attempt of a policeman to arrest a drunken man in a saloon next door, which had drawn a crowd at the hour the people were on their way to work, and so started the 'run'."


In Sneakers, the main character Martin Bishop and his antagonist Cosmo discuss about how information control can be used to produce bank runs.


In the 2000 film Nine Queens, the main characters Juan and Marcos go to cash the check from the sale of the Nine Queens stamp, only to find a bank run in progress at the bank in question.


References

  1. ^ a b Diamond DW, Dybvig PH (1983). "Bank runs, deposit insurance, and liquidity" (PDF). J Pol Econ 91 (3): 401–19.  Reprinted (2000) Fed Res Bank Mn Q Rev 24 (1), 14–23.
  2. ^ a b c d e f Diamond DW (2007). "Banks and liquidity creation: a simple exposition of the Diamond-Dybvig model" (PDF). Fed Res Bank Richmond Econ Q 93 (2): 189–200. 
  3. ^ Heffernan S (2003). "The causes of bank failures", in Mullineux AW, Murinde V: Handbook of international banking. Edward Elgar, 366–402. ISBN 1840640936. 
  4. ^ Brusco S, Castiglionesi F (2007). "Liquidity coinsurance, moral hazard, and financial contagion". J Finance 62 (5): 2275–302. doi:10.1111/j.1540-6261.2007.01275.x. 
  5. ^ Wicker E (1996). The Banking Panics of the Great Depression. Cambridge University Press. ISBN 0521663466. 
  6. ^ Bernanke BS (1983). "Nonmonetary effects of the financial crisis in the propagation of the Great Depression". Am Econ Rev 73 (3): 257–76. 
  7. ^ Cooper R, Ross TW (2002). "Bank runs: deposit insurance and capital requirements". Int Econ Rev 43 (1): 55–72. doi:10.1111/1468-2354.t01-1-00003. 
  8. ^ Maland CJ (1998). "Capra and the abyss: self-interest versus the common good in Depression America", in Sklar R, Zagarrio V: Frank Capra: Authorship and the Studio System. Temple University Press, 95–129. ISBN 1566396085. 
  9. ^ Eldis - Display
  10. ^ A Rush to Pull Out Cash, Los Angeles Times, 17 August 2007
  11. ^ Anxious Customers Crash Lender's Website, Financial Times, 14 September 2007
  12. ^ Northern Rock Savers Queue to Get Cash, The Daily Telegraph, 14 September 2007
  13. ^ Northern Rock besieged by savers, BBC News, 17 September 2007
  14. ^ Sidel R, Ip G, Phillips MM, Kelley K. "The week that shook Wall Street: inside the demise of Bear Stearns", Wall Street Journal, 2008-03-18. 
A digital object identifier (or DOI) is a standard for persistently identifying a piece of intellectual property on a digital network and associating it with related data, the metadata, in a structured extensible way. ... Ben Shalom Bernanke[1] is an American economist and current Chairman of the Board of Governors of the United States Federal Reserve. ... A digital object identifier (or DOI) is a standard for persistently identifying a piece of intellectual property on a digital network and associating it with related data, the metadata, in a structured extensible way. ... 2008 (MMVIII) is the current year, a leap year that started on Tuesday of the Anno Domini/Common Era, in accordance with the Gregorian calendar. ... is the 77th day of the year (78th in leap years) in the Gregorian calendar. ...

  Results from FactBites:
 
Bank Runs, by George G. Kaufman: The Concise Encyclopedia of Economics: Library of Economics and Liberty (1058 words)
A run on a bank occurs when a large number of depositors, fearing that their bank will be unable to repay their deposits in full and on time, try to withdraw their funds immediately.
If their concerns about the bank's solvency are unjustified, other banks in the same market area would generally gain from recycling funds they receive back to the bank experiencing the run.
Runs are feared even more because of their potential spillover to other banks.
Who's Afraid of a Run on Banks? -- y2kculture (418 words)
Keep in mind that Rockwell is a longtime critic of the current banking system, in which the Federal Reserve encourages banks to lend out much, much more money than they actually have in their vaults.
(Banks no longer act like storage lockers, where everyone can take out what they put in.) If everyone wants their money at once, only those lucky enough to be first in line can get it.
Seems to us that once the newly-minted money enters the banking system again -- either from relieved depositors or through indirect spending on purchases -- the banks will repay their loans to the Fed and we'll be back to normal.
  More results at FactBites »

 
 

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