Money, Banking and the central Banking system - the meaning of money - the problem of bank runs
5 important questions on Money, Banking and the central Banking system - the meaning of money - the problem of bank runs
What would happen if for some reason, all or most of its depositors did try to withdraw their funds during a couple of days?
- The banks would not be able to raise enough cash
- because banks convert most of their depositor funds into loans made to borrowers
- they would try an sell their loans at a discounted price
- they sell off their assets cheaply,
- the banks would not be able to pay off its depositors in full
- and this leads to a bank failure
How do banks earn revenue?
Are bank loans liquid? Why?
because they cant easily be converted to cash
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Why will trying to sell a loan not work for banks during a bank run?
as a result banks will put a discount on the loans as the only way to sell it
What might start bank runs?
- A spreading rumor that the banks is in financial trouble
- even the depositors are not sure the rumors are true
- they will still get their money out
- because other depositors think the bank will fail, they will take their money out
- and when all depositors join the rush the banks will fail
The question on the page originate from the summary of the following study material:
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