A bank run (also known as running in a bank ) occurs when large numbers of people withdraw their money from the bank, because they believe the bank may stop functioning in the near future. In other words, it is when, in the fractional reserve banking system (where banks usually only keep a small part of their assets as cash), a large number of customers withdraw cash from deposit accounts with financial institutions at the same time because they believe that financial institutions, or may become, bankrupt; and save cash or transfer it to other assets, such as government bonds, precious metals or gemstones. When they transfer funds to other institutions, it can be characterized as a capital flight. As the bank moves forward, it generates its own momentum: as more people withdraw cash, the possibility of default increases, triggering further withdrawals. This can shake the bank to the point where it runs out of cash and thus faces a sudden bankruptcy. To combat bank runs, banks can limit how much cash each customer can withdraw, suspend withdrawal at all, or immediately earn more money from other banks or from the central bank, in addition to other actions.
A bank panic or panic bank is a financial crisis that occurs when many banks suffer from running at the same time, as people suddenly try to turn their threatened deposits into money cash or trying to get out of their domestic banking system altogether. A systemic banking crisis is one in which all or almost all banking capital in a country is erased. The resulting bankruptcy chain could lead to a long economic recession when domestic businesses and consumers lack capital when the domestic banking system is closed. According to former US Federal Reserve Chairman Ben Bernanke, the Great Depression was caused by the Federal Reserve System, and much of the economic damage was caused directly by bank runs. The cost of cleaning the systemic banking crisis can be enormous, with an average fiscal cost of 13% of GDP and an average economic output loss of 20% of GDP for an important crisis from 1970 to 2007.
Several techniques have been used to try to prevent bank runs or reduce their effects. They have included higher reserve requirements (requiring banks to hold more of their reserves as cash), government bailouts, supervision and regulation of commercial banks, central bank organizations that act as lenders of last resort, protection of deposit insurance systems such as Federal Deposit Insurance Corporation USA, and after the run has started, the suspension of withdrawal. These techniques are not always successful: for example, even with deposit insurance, depositors may still be motivated by the belief that they may not have direct access to deposits during a bank reorganization.
Video Bank run
Histori
Bank runs first appeared as part of the cycle of credit expansion and subsequent contraction. In the 16th century onwards, the British blacksmiths issued promissory notes of severe failures due to poor harvests, falls in parts of the country to starvation and unrest. Other examples are Dutch Tulip manias (1634-1637), British South Sea Bubble (1717-1719), French Mississippi Company (1717-1720), post-Napoleon depression (1815-1830), and Great Depression (1929). -1939).
Bank runs have also been used to extort individuals or governments. In 1832, for example, the British government under the Duke of Wellington canceled the majority rule over the king's order, William IV, to prevent reform (the Reform Act of 1832). The actions of Wellesley upset the reformers, and they threatened to run in the banks under the cries of "Stop the Duke, go gold!".
Many recessions in the United States are caused by panic banking. The Great Depression contains several banking crises consisting of runs in several banks from 1929 to 1933; some of which are specific to the most common US Bank operating areas in countries where laws allow banks to operate only one branch, dramatically increasing risks compared to banks with multiple branches, especially when a single branch bank is in an area that the economy depends on one industry.
The banking panic began in Upper-South in November 1930, a year after the stock market crash, triggered by the collapse of a series of banks in Tennessee and Kentucky, which undermined their correspondent network. In December, New York City underwent a massive bank operation contained in many branches of a single bank. Philadelphia was hit a week later by a running bank that affects several banks, but was successfully contained by swift action by leading city banks and the Federal Reserve Bank. Withdrawals got worse after financial conglomerates in New York and Los Angeles failed in a closed scandal. Much of the economic damage the US Depression caused directly by the running bank, although Canada did not have banks running during the same era due to different banking regulations.
Milton Friedman and Anna Schwartz argue that the permanent withdrawal from banks by restless depositors ("hoard") was inspired by news of 1930 bank runs and forced banks to liquidate loans, which directly led to a reduction in the money supply, shrinking the economy. Banks continue to plague the United States for the next few years. The whole city ran Boston hit (December 1931), Chicago (June 1931 and June 1932), Toledo (June 1931), and St. Louis (January 1933), among others. The institutions imposed during the Depression have prevented runs in US commercial banks since the 1930s, even under conditions such as the saving crisis and US borrowing in the 1980s and 1990s.
The global financial crisis that began in 2007 centered around a market liquidity failure comparable to bank runs. The crisis contains a wave of bank nationalization, including those associated with Northern Rock of UK and IndyMac from the US. This crisis is caused by low real interest rates that stimulate asset price bubbles driven by new financial products that are not tested stress and fail. in descending condition.
Maps Bank run
Theory
Diamond and Dybvig developed an influential model to explain why bank runs occur and why banks issue more liquid deposits than their assets. According to the model, the bank acts as an intermediary between borrowers who prefer long-term loans and depositors who prefer liquid accounts. The Diamond-Dybvig model provides an example of an economic game with more than one Nash equilibrium, where it is logical for individual depositors to engage in a bank run after they suspect that it may start, although the process will cause the bank to collapse.
In the model, business investment requires expenditure in the present to obtain returns that require time to come, for example, spending on machinery and buildings now for production in the coming years. A business or entrepreneur who needs to borrow to finance an investment will want to give their investment a long time to generate a refund before full payment, and would prefer long term loans, which offer little liquidity to the lender. The same principle applies to individuals and households seeking financing to purchase large quantities of goods such as housing or cars. Households and companies that have money to lend to these businesses may have sudden and unpredictable cash needs, so they are often willing to lend only on the conditions guaranteed direct access to their money in the form of liquid demand accounts, that is, accounts with the shortest possible maturity. Because borrowers need money and depositors are afraid to make these loans individually, banks provide valuable services by raising funds from many individual savings, dividing them into borrowed loans, and spreading the risk of both default and sudden cash demand. Banks can draw much higher interest on their long-term loans than paying current accounts, enabling them to make a profit.
If only some depositors are attractive at any given time, this arrangement works fine. Except for some major emergency on a scale appropriate to or exceeding the bank's operating territory, the unpredictable demand for depositors for cash may not occur at the same time; that is, by law in large numbers, banks can only expect a small portion of accounts withdrawn on a single day because the needs of individual expenditures are largely uncorrelated. A bank can provide loans in the long term, while only saving a small amount of cash to pay depositors who may request a withdrawal.
However, if many depositors withdraw at once, the bank itself (as opposed to individual investors) may lack liquidity, and depositors will rush to withdraw their money, forcing banks to liquidate their assets with losses, and ultimately fail. If such a bank tries to call its loan early, businesses may be forced to disrupt their production while individuals may need to sell their homes and/or vehicles, causing further losses to a larger economy. Even so, many if not most debtors will not be able to pay the bank in full on demand and will be forced to declare bankruptcy, possibly affecting other creditors in the process.
Running a bank can happen even when it is started by a fake story. Even depositors who know the story is wrong will have an incentive to withdraw, if they suspect other depositors will believe the story. The story becomes a self-fulfilling prophecy. Indeed, Robert K. Merton, who coined the term self-fulfilling prophecy , the bank mentioned runs as a prime example of the concept in his book Social Theory and Social Structure . Mervyn King, governor of the Bank of England, once noted that it may not be rational to start a bank, but the rationale for participating in that one has already begun.
Systemic banking crisis
Bank runs are a sudden withdrawal of deposits from one bank only. panic banking or panic bank is a financial crisis that occurs when many banks suffer from running at the same time, as a cascade failure. In systemic banking crisis, all or almost all banking capital in a country is destroyed; this can occur when the regulator ignores systemic risk and spillover effects.
The systemic banking crisis is associated with large fiscal costs and large output losses. Often, emergency liquidity support and blanket guarantees have been used to overcome this crisis, not always successful. Although fiscal tightening may help withstand market pressures if the crisis is triggered by unsustainable fiscal policy, expansionary fiscal policy is usually used. In a liquidity and solvency crisis, the central bank can provide liquidity to support illiquid banks. The protection of depositors can help restore confidence, although it tends to be expensive and does not always speed up the economic recovery. Interventions are often delayed in the hope that recovery will occur, and these delays increase the pressure on the economy.
Some steps are more effective than others in reducing the economic impact and restoring the banking system after a systemic crisis. This includes establishing the scale of the problem, a debt assistance program targeted to distressed borrowers, corporate restructuring programs, recognizing bank losses, and capitalizing banks adequately. The speed of intervention seems very important; interventions are often delayed in the hope that bankrupt banks will recover if given liquidity support and regulatory relaxation, and ultimately this delay increases the pressure on the economy. The targeted program, which sets clear clear quantitative rules that limit access to favored help, and that contains meaningful standards for capital regulation, appears to be more successful. According to the IMF, state-owned asset management companies (bad banks) are largely ineffective due to political constraints.
A silent run occurs when the implicit fiscal deficit of unregistered government loss exposure to a zombie bank is large enough to deter depositors of these banks. As more and more depositors and investors begin to doubt whether a government can support a country's banking system, the system's silent system can collect steam, causing the zombie bank's funding costs to increase. If the zombie bank sells several assets at market value, the remaining assets contain a greater share of the losses that are not recorded; if he rolls his liabilities by raising interest rates, he squeezes his profits along with the benefits of a healthier competitor. The longer the silent walk continues, the more benefits are transferred from the healthy bank and tax payer to the zombie bank. The term is also used when a large number of depositors in countries with deposit insurance withdraw their balances below the limit for deposit insurance.
The cost of cleaning after the crisis can be enormous. In the systemically important systemic crisis of the world from 1970 to 2007, the average net recapitalization cost to the government was 6% of GDP, the fiscal costs associated with crisis management averaged 13% of GDP (16% of GDP if costs recovery is ignored), and the average economic output loss is about 20% of GDP during the first four years of the crisis.
Prevention and mitigation
Several techniques have been used to help prevent or reduce bank runs.
Individual bank
Some prevention techniques apply to each bank, regardless of other economic sections.
- Banks often project the appearance of stability, with solid architecture and conservative clothing.
- The bank may try to hide information that may trigger an escape. For example, in the days before deposit insurance, it makes sense for banks to have a large lobby and quick service, to prevent the formation of a line of depositors that extends to the road that may lead passers-by to conclude that the bank is running.
- The bank may try to slow down the run bank by artificially slowing down the process. One technique is to get a large number of friends and family bank employees to line up and make a large number of small and slow transactions.
- Scheduling prominent cash transfers can convince participants in running a bank that it is not necessary to withdraw deposits in a hurry.
- Banks may encourage customers to make irrevocable time deposits on demand. If time deposits form a high enough percentage of bank liabilities, then their vulnerability to bank runs will decrease significantly. The drawback is that banks have to pay higher interest rates on time deposits.
- Bank may suspend a temporary withdrawal to stop running; this is called convertibility suspension . In many cases, the threat of suspension prevents running, which means no threat is necessary.
- Emergency bank acquisitions are vulnerable by other institutions with stronger capital reserves. This technique is typically used by the US Federal Deposit Insurance Agency to dispose of insolvent banks, rather than paying depositors directly from their own funds.
- If there is no immediate prospective buyer for the failed institution, the regulator or deposit insurance company may establish a temporary operating bridge bank until the business can be liquidated or sold.
- To clean up after the bank's failure, the government can form a "bad bank", a new government-managed asset management company that buys individual non-performing assets from one or more private banks, reduces the proportion of junk bonds in their asset pools, and then acts as a creditor in case of bankruptcy that follows. This, however, creates a moral hazard issue, essentially subsidizing bankruptcy: poorly performing debtors can temporarily be forced to file for bankruptcy to make them eligible for sale to a bad bank.
Systemic techniques
Some prevention techniques apply throughout the economy, although they may still allow individual institutions to fail.
- The deposit insurance system insures each depositor up to a certain amount, so that the savings depositors are protected even if the bank fails. This eliminates the incentive to attract someone's deposits just because someone else withdraws their money. However, depositors may still be motivated by concerns they may not have direct access to deposits during the reorganization of the bank. To avoid the fear of escaping, the US FDIC maintains the secrecy of its takeover operation, and reopens the branch under new ownership the next business day. The government savings insurance program can be ineffective if the government itself is deemed to run out of cash.
- The requirement of bank capital reduces the possibility that the bank becomes bankrupt. The Basel III Agreement strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
- Full backup banking is a hypothetical case in which the reserve ratio is set to 100%, and the funds deposited are not lent by the bank as long as the depositor retains the legal right to withdraw funds on demand. With this approach, banks will be forced to match the maturities of loans and deposits, thus greatly reducing the risk of bank runs.
- The less severe alternative to full reserve banks is the reserve ratio requirement, which limits the proportion of deposits that can be borrowed by banks, thereby minimizing the possibility of banks to start, as more reserves will be available to satisfy the demands of depositors. This practice sets limits on fractions in the fractional reserve banking.
- Transparency can help prevent the crisis from spreading through the banking system. In the context of the recent crisis, the extreme complexity of certain types of assets makes it difficult for market participants to assess which financial institutions will survive, which strengthens the crisis by making the majority of institutions highly reluctant to lend to each other.
- Central banks act as lenders of last resort. To prevent banks from running, 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 sufficient liquidity to meet their deposits. Walter Bagehot's book, Lombard Street, provides an influential initial analysis of the lender's role of last resort.
The lender's role of last resort, and the existence of deposit insurance, both create moral hazard, as they reduce the bank's incentives to avoid making risky loans. They remain a standard practice, since collective prevention benefits are generally believed to outweigh the costs of excessive risk taking.
Techniques to deal with banking panic when prevention fail:
- Declare a bank emergency vacation
- The announcement of the government or central bank increases the line of credit, loans, or bailouts for vulnerable banks
In-fiction depiction
The panic of the 1933 bank was the setting of the game 1935 Archibald MacLeish, Panik . Other fictional depictions of bank runs include those of American Madness (1932), This is a Great Life (1946), Mary Poppins (1964 ), Noble House (1988) and The Whale Must Be Dead (1991)
Running in the bank is one of the many causes of suffering characters in Upton Sinclair's The Jungle.
References
External links
- Media associated with the Bank runs on Wikimedia Commons
Source of the article : Wikipedia
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