So far we have had North Rock, Bear Stearns and Indymac I wonder who will be next NAB ANZ
Also a run on a bank can be caused by a false rumour, perhaps one being run on Hotcopper by and overzealous poster or a journalist trying hard to make his articles interesting and keep his or her job.
read on v v v
Bank run From Wikipedia, the free encyclopedia
A bank run (also known as a run on the bank) is a type of financial crisis. It is a panic which occurs when a large number of customers of a bank withdraw their deposits because they fear it is, or might become, insolvent. This action can destabilize the bank to the point where it becomes insolvent. Banks retain only a fraction of their deposits as cash (see fractional-reserve banking): the remainder is invested in securities and loans. No bank has enough reserves on hand to cope with more than the fraction of deposits being taken out at once. As a result, the bank faces bankruptcy, and will 'call in' the loans it has offered. This can cause the bank's debtors to face bankruptcy themselves, if the loan is invested in a plant or other items that cannot easily be sold.
A banking panic or bank panic occurs if many banks suffer runs at the same time. The resulting chain of bankruptcies can cause a long economic recession.[1]
As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy. As more people withdraw their deposits, the likelihood of default increases, so other individuals have more incentive to withdraw their own deposits. A bank run is a kind of positive feedback loop which has much in common with the reflexive processes described by George Soros, amongst others. Another example of a reflexive process is economic bubble.
Theory Main article: Diamond-Dybvig model Diamond and Dybvig[2] developed an influential model to explain why bank runs occur and why banks issue deposits that are more liquid than their assets. The model starts with the observation that many productive assets, like store inventories and real estate, are illiquid, in that they are hard to sell immediately without taking a substantial loss. Also, individual investors in illiquid assets sometimes have a sudden, unpredictable need for liquidity, for example, to fund an entrepreneurial project that must be started quickly; and they are hampered because they cannot easily predict when these opportunities arise. By offering liquid deposit accounts from which money can be withdrawn at any time, and by using the proceeds to finance investment in illiquid assets, banks act as insurance arrangements that allow depositors to share the risk of losses due to early liquidation.[3]
If only a few depositors withdraw at any given time, this arrangement works well. If not, the bank itself (as opposed to individual investors) may run short of liquidity, and depositors will rush to withdraw their money, forcing the bank to liquidate its assets at a loss, and eventually to fail. If such a bank calls in its loans early, this may force businesses to disrupt their production, or individuals to sell their homes, causing further losses to the larger economy.[3]
A bank run can occur even when started by a false story. Even depositors who know the story is false will have an incentive to withdraw, if they think other depositors will believe the story. The story becomes a self-fulfilling prophecy.[3] Indeed, Robert K. Merton, who coined the term self-fulfilling prophecy, mentioned bank runs as a prime example of the concept in his book Social Theory and Social Structure.[4]
