In this section, we will discuss about “Bank Run” or “Run on a Bank” which is an important topic related to Banking Industry. Looking back in most recent case, when famous Investment bank Lehman Brothers filed bankruptcy in September 2008, ICICI Bank UK Plc held exposure of 57 million Euros in the Senior Bonds of Lehman Brothers. As ICICI Bank UK Plc is a subsidiary of ICICI Bank Limited, that incident spread fear in the mind of the Indian customers that ICICI Bank might collapse anytime due to heavy loss.
Bank Run or Run on a Bank is defined as a situation where a bank falls short of funds to meet the demand for withdrawal of deposits. The liquidity crisis happens mostly because of a series of excessive withdrawals, as a result of decline in depositor confidence. Depositors withdraw their entire deposit to transfer it to safer medium like Government bonds, precious metals etc.
For the case of ICICI Bank mentioned above, due to the news of heavy losses of the bank’s subsidiary, depositor confidence was shaken, leading to successive withdrawals by lots of customers. The situation was brought under control by repeated trust building measures by the bank, like sending message with details of the situation and disclosing of the bank’s detailed financial position.
If the series of withdrawals continued & spread across beyond control, the bank would have been in a Bank Run situation, struggling to meet the demand for withdrawals and subsequently leading to a zero liquidity situation for the bank.
Significance of Bank Run
A Bank Run or Run on a Bank might lead to closure of a bank due to non-availability of funds. The situation worsens if this bank run happens for more than one bank, leading to a Panic in the entire banking industry. When almost all of the capital gets wiped out due to more than on Bank Runs, it leads to a Systemic Banking Crisis. For a modern banking sector when some banks are interrelated, Bank run case for one bank often leads to more bank run cases just like chain reaction. Systematic Banking Crisis and multiple bank runs led to the great depreciation in USA in 1933, which is also the worst example of Bank run case in the history of Banking.
A Systemic Banking Crisis lasting for long time may result into more bankruptcies in different sector which only leads to an economic recession. The cost of recovery from such a crisis is very high and time consuming.
How to stop Bank Run cases