Transcript Macroeconomic

Macroeconomics Project
BM0008
Ms Eileen Ng
Topic
Bank Run
ICA 2 (15%)
Introduction
• Bank run - series of unexpected cash withdrawals
caused by a sudden decline in depositor confidence.
• When a lot of depositors make a withdrawal, it
depletes the cash in the bank and force the bank into
closure.
Factors that cause Bank Run
to occur
• Individual liquidity
shock
• bad loans factor
• bank losses factor
Individual liquidity shock
• depositor could suffer an
individual liquidity shock – e.g.
hospitalization fees, loss of jobs and earnings,
repair fees for natural disasters damages
• is considered non-stochastic
Individual liquidity shock
• external factors such as national disasters,
world depression, and currency crisis
• considered to be stochastic
• a hyper inflation economy can lead to bank
runs
Bad loans factor
• Bad loans occur when business borrowing money
from the bank for investment
• When investment fails, borrowers could not return
what they owe to the bank
Bad loans factor
• As a result, the bank has lesser
cash reserve than the original cash
deposits
• When the news that the banks has
lesser money than their initial
deposit,
Red Card!
For Not
Paying
Your Loans
To The
Bank.
Bad Loan Factor
• depositors tend to get worry
• encouraged them to withdraw
the money out from their bank
• creating a bank run
• when a country and world
recession occurs,
• bad loans would then be
consider to stochastic
• When this occurs, bank runs
may happen again.
•
For example in the currency crisis, lots of
business go bankrupt and thus their loans turned
bad and this leads to bank runs.
That’s For
Encouraging
Withdrawals
Of Money!
Bank losses factor
• Similarly with any other
companies, banks
require funds for their
daily operations .
• When a bank’s costs are
greater than their
income, there is a
tendency that the bank
would become bankrupt
Bank
Losses
Affect Our
Economy.
Bank losses factor
• they have to cease all of their
business operations as well.
• Hence, all loans and deposits
have to be written
• For example the Nick Leeson
case which brought down the
Barings Bank London England
by a loss of 1.3 billion dollars,
this leads to a bank run.
How Can
We Help
Our
Economy..
.
Money Supply
• Asian Financial crises in
1998 decrease of 40% GDP
in Argentina, Indonesia,
Korea and Malaysia.
• Bank run causes demand
deposit to drop affecting the
currency/deposit ratio.
• Cause the currency of the
country to weaken.
Expansionary Fiscal Policy
25
Recessionary
GAP
20
AE
15
10
5
Equilibrium
GDP
0
Real GDP
Full
Employment
GDP
Possible Remedy To Bank
Runs
• The natural inertia that keeps
even aware people from taking
action
• Reassuring statements by
banks. Examples include a
brochure and statement stuffer
• adverse clearing balances as
depositors shift funds to other
banks.
Possible Remedy To Bank
Runs
• Stockpiling currency in
anticipation of
increased withdrawals
• In the extreme case,
regulatory authorities
will limit cash
withdrawals from
financial institutions
Conclusion
• The whole economy will be affected by Bank
Runs.
• Government should come up with more policies
to avoid bank run.
• Bank runs do not only affect the economy but
also the depositors.
Done By:
•
•
•
•
•
•
Anson Koh
Weng Zhaoqin
Ong Tian Sheng
Khoo Yong Liang
Lee Weihan
Woo Zhi Ren
Tutor: Ms. Eileen Ng
041415E