Question

What can be done to avoid bank runs?

Answer 1

Taking the severity of bank runs it consideration, it becomes all the more important for banks to prevent such a situation from occurring. In order to prevent it, a bank can resort to one of the several prevention measures at its disposal. These include encouraging term deposits which cannot be withdrawn on demand, impose reserve ratiorequirement limiting a proportion of deposits the bank can invest, taking deposits from depositors who are less likely to observe common information which can trigger panic, suspend withdrawals to stop a bank run, etc. At the same time, the administration as a whole can also take some preventive measures - such as introducing full-reserve banking and deposit insurance, to prevent bank runs in the economy. Even the central bank makes some provision to lend short-term loans to those banks which are in crisis to help them sustain the bad phase.

There is no dearth of examples of bank runs in the history. At least eight bank runs have been reported from various parts of the world over the last decade alone; the last of which came with the failure of DSB Bank in Netherlands in 2009. In the United States, quite a few recessions have been triggered by runs on the bank caused by panic among people. With quite a few examples in the recent past, banks have no doubt become cautious about this crisis. But that doesn't mean that the chances of bank runs can be ruled out in the economic conditions prevailing today.