Question

One day several of your biggest depositors withdraw their funds and the bank is dangerously close to its reserve requirement. As the manager of the bank, what steps would you take to avoid a bank run and what costs might you incur?

Answer 1

Bank run is a situation in which the bank has a serious threat of getting liquidated because the people are putting out their money and the bank is on a verge of bankruptcy.

To prevent a bank run, I would be doing following things-

A I will be starting to freeze the new credits and I will be putting very high criterias for issuance of new credit.

B.I will borrow money and try to recapitalise the bank in order to have a better capital ratio.

C.I will also try to put various recovery incentive scheme so that the loans could be recovered as quickly as possible to order to improve the liquidity of the bank by increasing the cash.

D I will also be providing the salary of the employees through stock options that will prevent the cash outflow and that will help the company remaining liquid

E.I will try to ensure the deposits of the bank through guarantee so that there is less liquidation of the saving account.

these are the steps, i will be taking in order to save the bank from such situation.