Bank Runs
At the centre of any bank's operations is a relationship which at any given time could become a major problem, but for the great majority of the time is not. A bank relies on the fact that although any and all of its' depositors have a right to withdraw that money at a given time, it is very unlikely that a great number of them will. Indeed it is expected that on average about as many people will choose to deposit some money with a bank on a given day as will want to withdraw some. Of course, as it is likely that these amounts will not match exactly, a bank holds a percentage of its assets in cash or at least liquid reserves in order to make up the difference if this is necessary. The remainder of a bank's assets are split between short-term loans such as credit cards and overdraft facilities, which are relatively liquid. Liquidity being the relative ease with which an asset can be turned into cash. Thus long-term loans, perhaps to buy a house (mortgage), a car or to start up a business, repaid over a much longer period of time, are therefore much less liquid. This imbalance creates the possibility of a crisis situation where if a certain number of de
It is in these circumstances that a banking crisis can quickly develop as a result of any external shocks. We have already discussed the role of interest rates, and also the possible damaging effects of dramatic changes in the exchange rate. Balance of payments difficulties are also associated with periods of banking crisis. Also, if a bank has the majority of its liabilities (deposits) in one currency, and holds a greater number of its assets in another currency, a significant appreciation of one currency against the other can instantly lower the value of a banks' assets against the value of its liabilities, making it technically insolvent. · Kennedy, Susan Estabrook (1973) The Banking Crisis of 1933; University Press of Kentucky · Lewis, M.K. & Davis, K.T. (1987) Domestic & International Banking; Philip Allan Publishers Ltd Indeed, it has been shown that too many of the methods employed in order to reduce or eliminate bank runs have had serious side effects, either on the banks and depositors involved or on the economy as a whole. Regulators and government should seek to make banks more transparent in order to make contagion less indiscriminate and to hold them accountable their own bad practice instead of bailing them in fear of more serious problems. In addition, there should be better systems in place to attempt to recover bad loans more efficiently and effectively, and a better deposit insurance system which would discourage risk taking and reward prudent bankers and customers.
Some common words found in the essay are:
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Approximate Word count = 2056
Approximate Pages = 8 (250 words per page double spaced)
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