CAUSES OF BANK-RUNS ON BANKING INSTITUTIONS AND ITS IMPACTS ON MANAGEMENT OPERATIONS
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CAUSES OF BANK-RUNS ON BANKING INSTITUTIONS AND ITS IMPACTS ON MANAGEMENT OPERATIONS
Banking, bank run, consumer confidence, insolvency, and liquidity.
1. Introduction
Bank runs occur when a large number of customers with deposits in a bank are frightened that their bank will not refund their initial deposits in full and on time, thus they try to withdraw their initial deposits as soon as possible before the situation worsens.
Banks frequently confront such issues because, as profit-seeking organisations, they maintain only a portion of deposits and use the rest for lending and other investment purposes.
Because of their strong profit motives, some banks prefer to invest this money in long-term assets or securities such as government bonds and stocks.
When banks recognise that they have high cash demands but low deposits, they must immediately grow their cash reserves to fulfil those demands, which can be accomplished by borrowing from other prudent institutions.
Bank-runs have long been seen as a highly serious situation for banks. Some believe that a bank run is unlikely to result in the bank becoming insolvent.
However, when depositors and bank lovers are concerned that their bank is untrustworthy or that their financial condition is unstable, they may begin withdrawing funds in order to deposit in more trustworthy banks.
When the economy’s monetary policy is unstable, clients may lose trust in even the most reputable banks and opt to save or invest in other enterprises. Customers feel that the government’s destabilised monetary policy will damage banks in the economy, and even god banks, so they prefer to withdraw their money and invest or deposit it in international dependable banks.
A significant potential issue spreads to other financial institutions. The chance of this happening is dependent on what the “running” clients do with their monies.
Customers have several options, including: they can redeposit their funds in banks they believe are prudent, known as direct redeposit; if they believe no bank or financial institution is safe, they can buy short-term securities from the government, such as treasury securities, as a way to protect their money.
But what do those who sell securities do? If they deposit the gains in banks they know are safe, which is likely, this is an indirect redeposit; if none of the depositors, customers, or sellers of government securities believe that any bank is safe, the money is held as currency outside of the banking system.
The bank run on a single bank would then expand into a run on the entire financial system.
When a bank run occurs, the bank must swiftly increase its cash to satisfy depositor demand, which means that if cash is not increased, the bank will breach the contractual debtor-creditor relationship between the bank and its customers, in which the bank acts as a debtor to the creditor, the client.
Banks can frequently boost their cash by giving away securities or assets at prices lower than their true value if kept until maturity (fire sales). Because banks have a strong desire to make profits, they prefer to maintain little capital and invest more; therefore, when they begin selling assets at fire prices, they become bankrupt.
According to Tegwi (2010), a bank run is simply the quick withdrawal of a bank’s initial deposits.Customers who lose trust in a bank are more likely to withdraw their deposits, which can lead to bank-runs.
However, a good relationship between the banker and the customer, based on trust, is essential for a contractual relationship. The issue here is that the bank must constantly enhance the confidence and trust of the
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