Question

Explain why depository institutions are more prone make a run on the bank to withdraw money desperately, than other financial intermediaries.

Answer 1

Depository institutions are responsible for managing the investment and the securities of various investors and they are responsible to safeguard their investments so these depositories are always trying to secure the Assets of the investors

Bank run is a scenario in which there is an adequate risk on the the principal payment of the investors because investors are not believing in the repayment capabilities of the bank and they are withdrawing the money out of the system desperately so these depositories are an intermediary is who are responsible for safeguarding the Assets and in this case when there will be a large demand of investors in order to withdraw their assets out of the system so they will be trying to put their orders with their depositories for withdrawal of the Asset and these withdrawal of the Asset will be forwarded by the depository to the bank and in the short-term bank with faced off with whole lot of demand of withdrawals of securities, so sometimes it is not able to deal with such excess demands in short term and it has to pay securities by selling of the long-term assets which can adequately reflect on to the solvency of this banks.

So, the depositories institutions are making a run on the bank desperately in order to withdraw the securities in case of bankruptcy because the customers are always putting up with their demand of withdrawal of the securities with the depositories and depositories are responsible for safeguarding the Assets of these investors.