Question

ABC Bank is facing a financial crisis due to the simultaneous run of customers to the bank to convert their deposits in cash. With this situation, explain in your own words the reasons that drove the depositors to act in such a way. Assume you’re a top manager at the bank; explain what are the options that the management has that will save them from being insolvent due to the massive withdrawals.

Answer 1

When a large number of depositors wtends to withdraw their cash from bank at the same point of time, it is called as Bank Run. The reasons that drove the depositors to act in such a way could be as under -

1) Fraud within the company- Any fraud committed within the bank by the management , employees or any other third party which may bring distrust among the depositors. For example- giving loans to persons with proper verifications as done by YES Bank in India.

2) Fake news Circulated on socal sites - These days any news can become virsl overnight. people tend to share the news on social sites without verifying its authenticity. Any fake news circulated among the depositos against the bank can create panic situation among the depositors and they may run to withdraw their cashin the fear of losing money.

The options that the management has that will save them from being insolvent due to the massive withdrawals ccan be -

1) Insuring depositors:- Entire deposits available with the bank should be insured by the bank. If depositors are aware that their amounts are insured than this kind of panic situation will not arise.

2) Help from Central Bank:- Central bank is the apex bank of any country. If Bank run goes out of control then the bank can take help from the central bank which can assure the investors. The central bank can even act as lender of last resort to the depositors.

3) PAUSE the working :- The bank could discontinue the operation for short period of time so that withdrawls are stopped for sometime and people get time to think what actually is happening in the bank and what are the bank's plan to overcome it.