1) Identify the sources and discuss the consequences of bank runs, bank panics, and financial crises

Expert Solution

Bank run is defined as a sudden and collective withdrawal of money by many people at the same time fearing financial instability of a bank.

Causes: a. Regulation failure: When central bank or government fails to regulate a bank or is unable to guide bank/banks to follow financial rules and regulations.

b. Recessions and loss of confidence in economy may also make people fearful of bank deposits

c. Extreme inflation

d. Interdependence and domino effect : Many economies are interrelated today. If a large country like USA faces recession then dependent country many have economic fears.

Consequences: Reduced economic output and growth : As people withdraw money, banks are left with no found for lending and hence govt, people and business cannot borrow. This limits industrial activity and output. Unemployment goes up. Interest rate policies and macroeconomic management of an economy collapses. Foreign investment also flows away from a country worsening unemployment and inflation figures.Country credit rating goes down.

Other banks also have panic situation and rumors may lead to other banks having similar situation.

Rahul Sunny answered 1 year ago

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