I was in a dilemma for years, how bank run out of money this report gave me a chance to study the Question which is in my mind for a long period of time. The world has entered in to global financial crisis that is causing widespread of business contraction, increasing in being without a job in different fields, and cutting government revenues. Some shaking the sum of the world largest banks, house investments, and this started the companies have either declare bankruptcy or no financially support. All countries and emerging economies and developing nations and all industrialized countries have announced rescue packages. Many countries started borrowing money from IMF (International monetary fund as a last resort. This crisis has had shown the weakness in the financial system all over the world, showing that how the economics are interconnected and interdependent we are today.
Global Financial Crisis - Dow Jones Chart
The countries started to meltdown, United Kingdom government hits by 750http://4.bp.blogspot.com/_tONz1gBpS3c/SK6K65N4DFI/AAAAAAAAAXo/tXBMkX4PFpc/s200/pound+symbol.gif billion debts in 2008 which represent or compare to Britain's GDP (Gross Domestic Product) it is more than 50%. The European commission set a target for five member countries to start reducing their budget deficits. Unites states budget forecast shows they are to hit $1.8 trillion and in between 2010 and 2019 the total of 9.3$ trillion and the president Obama's budget which is designed on issues of healthcare, education and also reducing the green house emissions, with a budget of 3.55$ trillion. The biggest Insurance company in the world AIG losses 61.7$ billion in 2008
From the above we can see how the banks are going to crisis or bank run. With all this banking sector got effected as banks place a important role in everyday life of an individual as well as business, The banking catastrophe or crisis, also known as bank run, it happens when a hung number of customers try to withdraw their money (deposits) because they believe that the bank is or might become, bankrupt. As a bank disaster progress, it generate its personal energy, in a type of self-fulfilling prediction: as more persons withdraw the deposits, the chances of default grows, and this encourages additional withdrawals. This can weaken the bank to the face where it faces bankruptcy.
Some technique is able to help to put off bank crash and failure. They consist of short-term postponement of withdrawals, the institute of central banks that act as a lender of last resort, the protection of deposit insurance systems such as the U.S. Federal Deposit Insurance Corporation, and governmental bank regulation. These techniques do not forever work: for example and a recommendation: In 2009 ICICI bank, one of the biggest private sector bank in India faced the problem because of the rumours spread all over the India, people started queuing up at the atm and bank to with draw money, to stop this the financial minister issued a statement to solve the problems.
BANK RUN
How banks works and how bank run happens?
All Banks keep hold of only a party of their deposits as a cash. The rest of cash is invented in rest different fields like loan and securities. No bank has enough distance money on hand to manage with more than a faction of deposits being taken out at one time.
Diamond developed an important model to give details why banks runs happen and why banks issue deposits with the aim of are more solid than their assets. They view that bank as a mediator among borrowers who choose long term loans and depositors who wish liquid accounts.
In their model, business venture require money (expenditures) in here to get hold of income that takes time in future, ex: expenditure on machines and buildings now for manufacture in upcoming years. A business that wants to borrow to funding investment, and will prefer extended maturity loans, which put forward little liquidity to the principal. The household and firm who is have the funds to loan to these businesses might have unexpected, changeable needs for cash, so they need fast way in to their wealth in the form of liquid demand deposit accounts, that is, account with direct likely maturity. As borrowers require money and depositors fear to formulate these loans independently, banks offer an important facility by aggregating money from a lot of individual deposits, converting them into loans for borrowers, and distribution the risk together of non-payment and unexpected demands for cash.
If single a few depositors take out at any given time, this understanding works fine. Depositors' unpredictable wants cash are not likely to happen at the similar occasion; that is, by the law of big numbers banks can be expecting just a little proportion of accounts withdrawn on any one day for the reason that individual spending requirements are for the most part uncorrelated. A bank be able to make loans above a long prospect, while observance only relatively little amount of cash on hand to disburse some depositors who may require withdrawal.
Nevertheless, if a lot of depositors withdraw everyone on one occasion, the bank itself as oppose to person investor might run short of liquidity, and depositors will do too quickly towards withdraw their money, forcing the bank to liquidate a lot of its assets on a loss, and finally to fail. If such a bank calls in its loans before time on, this might force businesses to interrupt their production, or those to sell their homes, causing more sufferers to the big economy.
A bank run is capable to happen still, after started by a fake story. Still depositors who are recognize that the tale is no true will contain an inducement to draw away they money, if they imagine other depositors force to trust the story. The stories become a self-fulfilling forecast. In detail, Robert K. Merton, who coined the phrase self-fulfilling prophecy, mention bank runs as a major example of the idea in his book Social Theory and Social Structure.
Diamond-Dybvig form provides an example of an economic fixture by means of several Nash equilibriums where it is reasonable for individual depositors towards take on a bank run if they once they suspect one may get going, nevertheless that run will root the bank to fall down.
A bank crash affects just one bank. A banking terror or bank terror is a financial crisis that occurs while a lot of banks experience runs at the similar time. In a total banking crisis, all or approximately every bit of the banking capital in a nation is wiped away.
Universal banking crises are linked with large fiscal expenses and big output losses. Often, urgent situation liquidity holds up and blanket security contain been used to hold these crises, not forever successfully. Though economic slimming down may help hold market pressure if a crisis is activate by unsustainable economic policies, expansionary economic policies are uncharacteristically used. In crisis of liquidity and solvency, central banks can endow with liquidity to hold up illiquid banks. Depositor safety can help restore assurance, even though it tends to be expensive and does not necessarily bust up economic recovery. Intervention is frequently belated in the hope that recovery might occur, and this delay increases the pressure on the financial system.
Some way are more successful than others in containing financial outcome and restoring the banking structure after a universal crisis. These take account of establishing the extent of the trouble, targeted debt assistance programs to upset borrowers, business reorganization programs, recognize bank sufferers, and passable capitalizing banks. Quick intervention appears to considerably reduce pressure on the economy. Programs that are under attack, that specify clear scientific rules that restrict right of entry to preferred assistance and that include important standards for capital guideline, emerge to be more successful. Government-owned assets Organization Company are mainly ineffective because of the political constraints.
("A bank or financial institution with negative net worth. Although zombie banks typically have a net worth below zero, they continue to operate as a result of government backings or bailouts that allow these banks to meet debt obligations and avoid bankruptcy. Zombie banks often have a large amount of nonperforming assets on their balance sheets which make future earnings very unpredictable")
An unspoken run occurs when the unspoken fiscal deficit from a government's unbooked loss spotlight to zombie banks is great sufficient to deter depositors of those banks. As additional depositors and investors start to doubt whether a government can bear a country's banking structure, the silent run on the banks be able to gather steam, causing the zombie banks' financial support expenses to increase. If a zombie bank sells a number of assets at market price, its remain assets have a larger portion of uncooked losses; if it rolls more than its liabilities at increased interest rates, and it reduce its profits all along with the profits of better competitors. The longer the quiet run goes on, the more benefits is transfer from healthy banks and taxpayers to the zombie banks.
The price of organization up after a crisis can be real massive. In systemically significant banking crises in the world from 1970 to 2007, the standard net recapitalization price to the government was 6% of GDP, financial expenses linked with crisis management averaged 13% of GDP or 16% of GDP if cost recovery are uncared, and economic in losses averaged about 20% of GDP through the first four years of the crisis.
Examples of banking crises:-
In the year 1999, the bank run was happened in Malaysia where Negara Malaysia bank (the central bank of Malaysian) had to take control of MBF finance. It was the biggest financial company at that time in Malaysia. During that time 120 branches saw the bank runs on the deposits, around $4.49 billion US.
In early 2007, the American firm, countrywide financial had suffered a crisis as an effect of subprime mortgage crisis.
Conclusion:
As we all know banks play an important place in over life because of the money we are dealing with, with help this report I am trying to show how bank run or banking crisis happen. When they is an economy failure how banks get effected and also roomers place an important role too, this report give you an idea how banks works and how bank can lend money to business and to lend where the money comes from. How do they divert money in do different sections (investment, loans etc) and keep some money in hand, we also learn how the bank run happens it may be because of the different aspects like polices or economy failure. If the bank run is happening how the banks try to stop them, now a days because of the zombie banks how economy is getting effecting, what we need to do to stop bank run.
Recommendations:
For one bank:
They are sum preventions methods can be used for banking sector or rest of the economy. Bank should start taking or can take money in the form of deposits from depositors who do not have the common information which might spark the run. For example, in the days previous to deposit insurance, it made sense in favour of a bank to have a great lobby and quick facility, to avoid a line of depositors from extend away into the street, causing passers-by to assume that a bank run is occurring.
Bank suspending temporary withdrawals to stop the bank run. In most of the cases this can prevent the bank run, which is there need not be take out.
To stop bank run, nationalising the bank or govt controlling the bank.
For the banks:
As the central bank is the leader of all banks and the leader of last resort. To stop the run, the central bank give and assurance that it will lend the banks the money in the form of short-term loans. To ensure that to remain economically possible, so that they will always have enough cash in hand to honour their deposits.
