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Runs on the Bank: When a few peoples' worry causes a frenzyBY: Guest | Category: Finance | Post Date: 2010-01-30
Though there remains in popular culture the story of people who keep all of their money in their mattress, most people keep their money secure in a bank. By having your money in the bank, you not only don't have to worry as much about having it stolen or misplaced, but you also are able to receive interest from the bank. However, when the economy isn't doing well, some people begin to panic and lose trust in the bank's ability to keep their money safe. When this happens, a lot of people all at once may decide to withdraw their money from the bank. This is called a "run on the bank." If the bank really was just a safe holding everyone's money, this wouldn't be a big deal. Each bank customer would be able to withdraw their money and do with it whatever they want. A problem occurs, however, when everyone wants to withdraw their money because the bank doesn't actually hold on to the money. The reason that the bank can pay interest is because they are in essence borrowing your money so that they can invest it and yield a higher return than what they are paying you in interest. Though usually the banks keep enough on hand to manage the everyday requests for withdrawing money, when there is a run on the bank, the bank doesn't have enough money to meet the requests. When this happens, the bank faces the risk of becoming insolvent (having an inability to pay off their debts as their due dates come about). Many countries have a history of bank runs. According to Wikipedia (accessed 1/29/10), Many of the recessions in the United States were caused by banking panics. The Great Depression contained several banking crises consisting of runs on multiple banks from 1929 to 1933; some of these were specific to regions of the U.S. Banking panics began in October 1930, one year after the stock market crash, triggered by the collapse of correspondent networks; the bank runs became worse after financial conglomerates in New York and Los Angeles failed in prominently-covered scandals. Much of the Depression's economic damage was caused directly by bank runs, and institutions put into place after the Depression have prevented runs on U.S. commercial banks since the 1930s, even under conditions such as the U.S. savings and loan crisis of the 1980s and 1990s. Because of this situation and others like it, the United States federal government has implemented measures to help reduce the likelihood of bank insolvency and runs on the bank. One of these strategies was the creation of the Federal Reserve. The governing board of this institution helps to oversee the overall economic status of the United States, and makes regular reports to congress. This is among many reasons what the Chair of the Federal Reserve, Ben Bernanke, was named Time magazine's person of the year for 2009. On a more practical level, the Federal Deposit Insurance Corporation (also known as the FDIC) insures deposits up to $250,000 per depositor per financial institution. This insurance should make runs on the bank less likely, though often people fear that they will have less access to their money if a bank becomes insolvent and they need to utilize their FDIC insurance. Article Source: http://www.writearticles.org About Author / Additional Info: Additional Articles: * More Than Just Dinner and a Movie: Getting to Know One Another * How to turn men off - Tips and Tricks! * Foods Like Kefir Keep You Healthy * Some Personal Thoughts About Modern Technology- like the computer and cellphone * Politics- A different View of It Does this article violate or infringe on your copyright ? It is a violation of our terms for authors to submit content which they did not write and claim it as their own. If this article infringes on your copyrights, then use our Contact us form with the detailed proof of infringement along with the offending article's title, URL and writer name. If you do not hear back from us then contact us again in another 10 days. Thank you. Comments on this article: (0 comments so far) * Additional comments are now closed for this article *
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