ðšA bank run occurs when a large number of depositors ðž withdraw their funds from a bank ðŠ due to concerns about the bank’s solvency or liquidity ð§. This sudden and simultaneous withdrawal of funds can lead to a liquidity crisis for the bank, as it may not have enough cash reserves ð° to meet the demand for withdrawals.
The effect of a bank run can be significant and can result in a number of negative consequences ð:
1ïžâ£ First, the bank may be forced to sell assets at a loss ð» to raise cash to meet the demand for withdrawals, which can further erode the bank’s financial position.
2ïžâ£ Second, a bank run can trigger a domino effect ð, as other depositors may also become concerned about the safety of their deposits and rush to withdraw their funds as well. This can lead to a systemic crisis, as other banks may also experience runs and the entire banking system can be destabilized.
3ïžâ£ Third, a bank run can lead to a credit crunch ð³, as the bank may be unable to lend money to borrowers due to a lack of liquidity. This can have a negative impact on the broader economy, as businesses may struggle to access credit and may be forced to lay off workers or even shut down.
Overall, a bank run can have serious consequences ðªïž for the bank, the banking system, and the broader economy, making it a significant concern for regulators and policymakers ðïž.
Causes & consequences of a bank run
- March 15, 2023