Question

Explain why depository institutions are more prone to “runs” than other financial intermediaries.

Answer 1

Depository will be meaning all such organisations which will be storing the securities of the individuals and it can refer to a bank or other investment depositories.

When there is a bank run, It will mean that investors are running out in order to take out the money out of the bank because they are afraid that financial system is not strong enough to repay their capital and they want to withdraw their money out of the depositories, which will be Bank in this case, so they will be running to withdraw the money out of the bank because they are afraid of the creditworthiness of the bank in order to pay their deposits, so in a case of bank run, depositories will be most prone to risk because there would be highest withdrawals of money out of the system by the depositors as they are fearing that there is not appropriate mechanism in order to pay out their capital, so they are withdrawing their money out of the system.

Bank run is a scenario in which there is a a high level of fear about losing of the investments so investors are keen on withdrawing of their capital in order to avoid any kind of risk regarding the repayment of their capital so they will be trying to to withdraw their capital in order to avoid any kind of risk and that's why the depositories are most prone to withdrawals in a case of bank run.