Bank Run

Examples of Bank Run in the following topics:

• Causes of Banking Crises

  • Banking crises can be caused by inadequate governmental oversight, bank runs, positive feedback loops in the market and contagion.
  • Banking crises are when there are widespread bank runs: an abnormal number depositors try to withdraw their deposits because they don't trust that the bank will have the deposits for withdrawal in the future.
  • Bank Run: A bank occurs when many people try to withdraw their deposits at the same time.
  • The Great Depression highlights how bank runs caused a banking crisis, which ultimately became a global economic crisis.The Great Depression in 1929 resulted from a variety of complex inputs, but the turning point came in the form of a mass stock market crash (Black Tuesday) and subsequent bank runs.
  • Describe some common causes of a banking crisis, Explain a bank run

• Consequences of Banking Crises

  • Banking crises have a range of short-term and long-term repercussions, domestically and globally, that reduce economic output and growth.
  • Banking crises have a range of short-term and long-term repercussions, domestically and globally, that underline the severe repercussions of irresponsible banking practices, poor governmental regulation, and bank runs.
  • The most useful way to frame the consequences of bank crises is by observing the critical role banks play in economic growth, primarily through investment and lending.
  • Within a given system, banking failures create a range of negative repercussions from an economic perspective.
  • Banks also perform more poorly, due to the fact that they have less capital to invest and returns to acquire.

• The Structure and Function of Other Banks

  • Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior.
  • The banks borrow cash, and when the repo notes come due the participating banks bid again.
  • The Executive Board is responsible for implementing monetary policy and the day-to-day running of the bank.
  • The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based.
  • Summarize the structure of the ECB, the Bank of England, and the People's Bank of China

• The Special Case of Banking

  • Banks are a special case when it comes to regulation.
  • In the resulting "runs" on banks, depositors often lined up on the streets in a panicky attempt to get their money.
  • Deposit insurance was designed to prevent such runs on banks.
  • First, government deposit insurance protects small savers and helps maintain the stability of the banking system by reducing the danger of runs on banks.
  • Besides giving banks funds that can be used to absorb losses, capital requirements encourage bank owners to operate responsibly since they will lose these funds in the event their banks fail.

• The Reserve Ratio

  • Banks assume responsibility for consumer deposits and make money by loaning out deposited finds.
  • Therefore, banks with relatively higher deposits are able to supply a larger amount of loanable funds.
  • In order to reduce the risk of a panic or "run on bank" from the perception that a bank may not have adequate liquidity to meet depositor access to cash deposits, central banks have adopted policies to ensure that banks use prudent judgement when assessing the amount of deposits to loan.
  • The reserve ratio is a central bank regulatory tool employed by most, but not all, of the world's central banks.
  • Required reserves are normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank.

• Institutions, Markets, and Intermediaries

  • A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers).
  • Banks are a classic example of financial institutions.
  • Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.
  • Though, perhaps the most well-known of financial intermediaries, banks represent only one intermediary within a larger group.
  • Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities.

• The Taylor Rule

  • Taylor's rule was designed to provide monetary policy guidance for how a central bank should set short-term interest rates.
  • The rule stipulates how much a central bank should change the nominal interest rate (real rate plus inflation) in response to changes in inflation, output, or other economic conditions.
  • In particular, the rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point.
  • Stanford University Professor John Taylor is the creator of the Taylor Rule, a monetary policy instrument developed to promote stable economic growth and limit short-run economic disruption related to inflation.

• Arguments For and Against Inflation Targeting Policy Interventions

  • Inflation targeting often succeeds in controlling inflation and anchoring expectations, but may limit a central bank's flexibility.
  • When the central bank announces an inflation target of 2%, the public knows that if inflation goes too far above or below that level, the central bank will take action.
  • During a recession, for example, central banks shouldn't raise the interest rate even if inflation is above the target level.
  • Others suggest targeting long-run inflation, which takes the exchange rate into account, rather than the short-term inflation rate.
  • Argue that central banks should maintain inflation targets, Argue that central banks should not maintain inflation targets

• Introduction to Monetary Policy

  • Monetary policy is the process by which the monetary authority of a country, which could be a government agency or a central bank, controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.
  • Without a policy intervention the output gap may correct itself, if falling wages and prices shift the short-run aggregate supply curve to the right until the economy returns to the long-run equilibrium.
  • Expansionary monetary policy consists of the tools that a central bank uses to achieve this increase in aggregate demand.
  • Suppose, for example, that high short-run aggregate demand creates an equilibrium in which prices are higher than in the long-run equilibrium.

• The Money Multiplier in Theory

  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • Central bank money, on the other hand, is the money created by the central bank and used within the banking system.
  • It consists of bank reserves held in accounts with the central bank, as well as physical currency held in bank vaults.
  • If banks lend out close to the maximum allowed by their reserves, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier.
  • If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the theoretical multiplier.