What is a bank run?

What is a bank run?

• A. A decrease in interest rates
• B. When customers withdraw deposits simultaneously due to solvency concerns
• C. A situation where banks increase their reserves
• D. When a bank opens new branches

Answer: (B)

A bank run occurs when a large number of customers withdraw their deposits from a bank at the same time, typically driven by fears that the bank may become insolvent. This phenomenon can create a self-fulfilling prophecy; as more people withdraw their money, it can lead to actual liquidity issues for the bank, potentially pushing it towards failure. During a bank run, the panic among customers usually arises from rumors or fears regarding the bank’s financial stability. The sudden surge in withdrawal requests can create a strain on the bank's reserves, as banks typically hold only a fraction of deposits as cash and lend out the majority. Hence, widespread simultaneous withdrawal can disrupt the bank's operations and lead to its collapse if it cannot meet the demands of its depositors. The other options presented do not accurately describe a bank run. A decrease in interest rates relates to monetary policy rather than customer behavior concerning bank deposits. The increase of bank reserves occurs under different circumstances and doesn't reflect customer actions. Finally, the opening of new branches is a strategic decision for a bank’s expansion and does not relate to customer panic or withdrawal behavior.

A bank run occurs when a large number of customers withdraw their deposits from a bank at the same time, typically driven by fears that the bank may become insolvent. This phenomenon can create a self-fulfilling prophecy; as more people withdraw their money, it can lead to actual liquidity issues for the bank, potentially pushing it towards failure.

During a bank run, the panic among customers usually arises from rumors or fears regarding the bank’s financial stability. The sudden surge in withdrawal requests can create a strain on the bank's reserves, as banks typically hold only a fraction of deposits as cash and lend out the majority. Hence, widespread simultaneous withdrawal can disrupt the bank's operations and lead to its collapse if it cannot meet the demands of its depositors.

The other options presented do not accurately describe a bank run. A decrease in interest rates relates to monetary policy rather than customer behavior concerning bank deposits. The increase of bank reserves occurs under different circumstances and doesn't reflect customer actions. Finally, the opening of new branches is a strategic decision for a bank’s expansion and does not relate to customer panic or withdrawal behavior.