Macroeconomics ProjectBM0008

Ms Eileen NgTopic

Bank Run

ICA 2 (15%)

Introduction

• Bank run - series of unexpected cash withdrawals caused by a sudden decline in depositor confidence.

• When a lot of depositors make a withdrawal, it depletes the cash in the bank and force the bank into closure.

Factors that cause Bank Run to occur

• Individual liquidity shock

• bad loans factor

• bank losses factor

Individual liquidity shock

• depositor could suffer an

individual liquidity shock – e.g. hospitalization fees, loss of jobs and earnings,

repair fees for natural disasters damages • is considered non-stochastic

Individual liquidity shock

• external factors such as national disasters, world depression, and currency crisis

• considered to be stochastic

• a hyper inflation economy can lead to bank runs

Bad loans factor

• Bad loans occur when business borrowing money from the bank for investment

• When investment fails, borrowers could not return what they owe to the bank

Bad loans factor

• As a result, the bank has lesser cash reserve than the original cash deposits

• When the news that the banks has lesser money than their initial deposit,

Red Card! For Not Paying

Your Loans To The Bank.

Bad Loan Factor

• depositors tend to get worry • encouraged them to withdraw

the money out from their bank• creating a bank run• when a country and world

recession occurs,• bad loans would then be

consider to stochastic • When this occurs, bank runs

may happen again. • For example in the currency crisis, lots of

business go bankrupt and thus their loans turned bad and this leads to bank runs.

That’s For Encouraging Withdrawals Of Money!

Bank losses factor

• Similarly with any other companies, banks require funds for their daily operations .

• When a bank’s costs are greater than their income, there is a tendency that the bank would become bankrupt

Bank Losses

Affect Our Economy.

Bank losses factor

• they have to cease all of their business operations as well.

• Hence, all loans and deposits have to be written

• For example the Nick Leeson case which brought down the Barings Bank London England by a loss of 1.3 billion dollars, this leads to a bank run.

How Can We Help

Our Economy..

.

Money Supply

• Asian Financial crises in 1998 decrease of 40% GDP in Argentina, Indonesia, Korea and Malaysia.

• Bank run causes demand deposit to drop affecting the currency/deposit ratio.

• Cause the currency of the country to weaken.

0

5

10

15

20

25

Real GDP

AE

Equilibrium GDP

Full Employment GDP

Recessionary GAP

Expansionary Fiscal Policy

Possible Remedy To Bank Runs

• The natural inertia that keeps even aware people from taking action

• Reassuring statements by banks. Examples include a brochure and statement stuffer

• adverse clearing balances as depositors shift funds to other banks.

Possible Remedy To Bank Runs

• Stockpiling currency in anticipation of increased withdrawals

• In the extreme case, regulatory authorities will limit cash withdrawals from financial institutions

Conclusion

• The whole economy will be affected by Bank Runs.

• Government should come up with more policies to avoid bank run.

• Bank runs do not only affect the economy but also the depositors.

Done By:

• Anson Koh• Weng Zhaoqin• Ong Tian Sheng• Khoo Yong Liang041415E• Lee Weihan• Woo Zhi Ren

Tutor: Ms. Eileen Ng