Keeping your money in a bank seems like a good idea. However, from time to time,

Question

Keeping your money in a bank seems like a good idea. However, from time to time, depositors lose confidence in banks (this happened in summer of 2012 in Greece). In chapter 14 we learned that when many people lose confidence in a bank at the same time it is called a “bank run”, and when this happens to many banks at the same time it is called a “bank panic”. Runs and panics occur following the realization that banks may have made bad loans, and may be unable to provide depositors with access to their funds. So it’s clear that there is some risk in keeping your money at a bank.

A) If your bank was experiencing a run, would you join in, or would you be confident that the FDIC would be there to insure your account?

B) Since the European Union does not have a unified banking system (and possibly other reasons) there is no deposit insurance at most European banks. If you had a bank account in Europe, would you be more, less, or equally as likely to participate in a bank run?

C) If it was a panic instead of a run, would you feel safe? Why or why not?

Explanation / Answer

Bank run is a situation in which depositors are trying to withdraw more money than liquidly available cash with bank. Its not a condition of bank default. Most of the money of bank is invested in long term assets (loans are the assets for bank) and it will take time to liquidate these money. To participate in run or not, being a layman, Its all depends on how much interest i am earning on my deposit. If its good enough i will wait. And earning are not adequately good i might participate in run. Its all depends on risk and rewards.

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