What Is A Bank Run?

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Published: 09th July 2012
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How Banks Handle Money
Everybody knows that banking institutions are in the money enterprise by taking deposits from one lot of people and making loans out to a further group of people. As a saver you visit a bank and hand over your hard earned money in the trust that they're going to take care of it, and in return you will get interest (depending your region on the globe, interest in 2012 is pretty close to zero). Unless you place your money with a bank for a timeframe that cannot be broken, through something that is regarded as a CD, or Certificate of Deposit, you basically make a demand deposit.
This simply means that you choose to lodge cash with financial institution and can at anytime go to your commercial bank inquire about your hard earned dollars and have them returned back to you or moved to yet another account in another bank or investment company. Although you have little power over precisely what the bank actually does with your money when you leave, you've still got, in theory, complete control over whether your money stays in that bank.
For the purpose of understanding what a bank run is you should be aware of the following. Let's imagine you deposit $1000 with your financial institution in a demand deposit account, that allows you to withdraw your money whenever you so choose. The bank works with a a part of that money (around 90%) to make financial loans for other people and charge them interest on those financial products. Thousands of other people do exactly the same thing and the banking institution basically merely holds a small fraction of the deposits instantly attainable, hence the term Fractional Reserve Banking.
Just about all is okay as long as those people that got the financial products keep making repayments, and people who deposit money don't want to withdraw considerable amounts within a short space of time.

What Sets off A Bank Run?
In normal economic situations in which there are no increased levels of loan defaults, this process of fractional reserves operates without a lot of people being worried about it. The problem appears when there is some sort of large scale worry, panic or hysteria. The most recent crisis can really be described as a panic scenario, and as we all lived through it we should have a very good notion what the broad feeling was like.
For any run on a bank to be triggered numerous bad, sorry, very bad news items have to make it out to the general public through the media. Negative news can include, but is not restricted to, a major deception scandal, unexpected failures around the loans made, a debilitating information systems problem or unanticipated deterioration in the financial system.
A lot of these situations might cause a substantial amount of individuals who have deposits with a banking institution to arrive at their bank to get or move their funds. Bear in mind the way I just remarked that with the Fractional Reserve Banking system, banks just hold a part of client's deposits easily accessible, typically around 10%. All it effectively takes for a bank to be compelled to close its gates is for more than 10% of its deposit clients to request their cash.

If you would like some historical information take aloof at this article on what a bank run is.

You can also find some of my other articles here: http://www.infobarrel.com/Users/DaddyDadChris

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