If it turns into a stampede, the bank may run out of cash and face sudden bankruptcy.
Smart Banking: What Is A Bank Run? | ethysintreatew.tk
The financial institution can take some measures to protect itself. For example, it can limit how much customers can withdraw or close its doors temporarily. Additionally, the bank can try to obtain cash from the central bank or other banks.
Panic can kill a business. Even though a bank run might be the result of just panic, it cannot ignore the psychological factor. Like many types of fishes, as well as geese, flamingos, sheep, etc. We, therefore, have a herd instinct.
This instinct can influence our judgment and decision making. We like to do what most other people are doing. A bank run may not destroy just one bank, but a whole string of them. As soon as the second financial institution falls, it is not usually long before others also collapse.
Put simply; it is like standing a series of dominoes in a line, one behind the other. When you knock one down, all the others start falling too. Former U. He said that bank runs directly caused the most severe economic downturn in modern US history. In the United States, there were many bank runs in the s and early s.
The FDIC insures banking deposits. Governments, central banks, and regulators have used many techniques to minimize the effects of bank runs, including:.
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Despite all these techniques, there are times depositors still feel unsure about the safety of their money. Start your free trial today and get unlimited access to America's largest dictionary, with: More than , words that aren't in our free dictionary Expanded definitions, etymologies, and usage notes Advanced search features Ad free! Join Our Free Trial Now! History and Etymology for bank run bank entry 1 Keep scrolling for more Learn More about bank run Share bank run Post the Definition of bank run to Facebook Share the Definition of bank run on Twitter Dictionary Entries near bank run bank pole bank rate bankroll bank run bankrupt bankruptcy bankrupt worm.
Accessed 27 November Keep scrolling for more More Definitions for bank run bank run. What It Is A bank run occurs when a flood of depositors withdraws funds from a bank within a short time frame. Rather, when people deposit funds in a bank, the bank lends a portion of those funds to people who want loans for houses, cars, businesses or whatever else. By lending out deposits , banks make money in the form of interest.
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However, they must keep a portion of those deposits on hand at all times to support the day-to-day inflow and outflow of funds that depositors need. Worried about the money in his checking and savings accounts there, John runs over to the bank and withdraws all of his money. He also tells his sister, his nephews and his parents, who also withdraw their money.
Soon, more people withdraw their funds or transfer them to other banks. The rumor is not true, and Company XYZ is in fine financial health.
But by this point, Bank XYZ has given out so much cash from its vault that now it really is having a hard time fulfilling the withdrawal requests from its customers. The downward cycle continues.
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Eventually, the withdrawals reach a point where Company XYZ is drained of cash, actually does become financially unstable and goes under. The run becomes a self-fulfilling prophecy. Why It Matters Bank runs can destabilize the banking system quickly, which is why the Federal Reserve sets a reserve requirement for banks. This ensures that Bank XYZ always has some money on hand to prevent a run.
A Model of a Systemic Bank Run
If a bank is unable to meet its reserve ratio, it can borrow from the Federal Reserve to meet the requirement. Source: Investing Answers Comments on bank run What made you want to look up bank run? Please tell us where you read or heard it including the quote, if possible. Test Your Knowledge - and learn some interesting things along the way. Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!
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