Why Bank Panics Matter: Cross-Disciplinary Economic Theory. A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time. Oxford, England: Oxford University Press, 2009. Princeton, New Jersey: Princeton University Press, 2008. Why Are There So Many Banking Crises?: The Politics and Policy of Bank Regulation. Massachusetts, United States: Cengage, 2008. When banking panics occur, the money supply decreases abruptly and severely, which might cause a serious recession, like the Great Depression that lasted from 1929 to 1939. This whole situation complicates the control of the money supply and this sudden decrease in the money supply can cause a recession, which is really bad. Second, the simultaneous withdrawal of funds from multiple banks leads to the depletion of the banking system’s reserves. First, people lose confidence in the banking system and banks are short of funds. – Bank runs and bank panics can have serious consequences for everyone, from customers to banks and ultimately the nation. They might as well want to withdraw their own funds, resulting in a similar situation which would eventually force them to close their doors too. Hearing that their neighboring banks were facing a cash crunch might lead the customers of other banks to question the efficiency of their own banks. Fearing bank collapse or losing confidence in the banks, the depositors make a run for the banks for immediate cash withdrawals almost at the same time. – Bank run is a financial crisis that occurs when depositors lose confidence in the banking system or suspect that a bank may cease to function. When multiple banks suffer similar fate and face runs at the same time over concerns of banks becoming insolvent, this random chain of events cause banking panics or bank panics. – When a significant number of customers or clients of a bank or financial institution make a run for the banks to withdraw their respective deposit amounts all at the same time over concerns of bank’s efficiency and ability to function in the near future, an unexpected event takes place which is nothing less of a financial crisis. Difference between Bank Run and Bank Panic Meaning So, a bank run might lead to bank panics, which might cause a serious financial problem for the nation. The bank with unusual number of bad loans would be in big trouble, and if the depositors got a hint of this, there might be a run on the bank. However, during recessions, many businesses go bankrupt, so fewer bank loans are repaid. A rapidly changing environment is a prerequisite to financial instability, though not all banking panics are associated with recessions. The fear of random deposit withdrawals and the risk of not being able to withdraw funds from the banks trigger a random but serious event called a bank run, which eventually turns to bank panics. Bank panics are randomly occurring events that create a sense of fear among the depositors and expose them to the risk of loss. Unable to meet the withdrawal needs of its depositors, the banks are forced into costly and time-consuming liquidation of assets. Bank panic is a financial crisis that occurs when multiple banks suffer runs at the same time, as depositors make a run for the banks simultaneously fearing the banks will become insolvent.
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