Banks have been always plagued by the problem of
bank runs. Freixas and Rochet (1997) define a
bank run as a situation wherein depositors observe large withdrawals from their bank, fear bankruptcy and respond by withdrawing their own deposits.
'Your right chairman, because if only two or three countries in the world have bank secrecy laws, then the concern really is not with respect to possible
bank runs because these laws have been lifted in other countries.
Fear of a
bank run has led the government, which is led by Nicos Anastasiades, to keep banks closed until at least Thursday.
(1) The view on fundamental-based
bank runs argues that
bank runs occur when depositors receive negative information about their bank's portfolio returns or about an aggregate liquidity shock.
'The threat of cascading default,
bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,' Geithner told the International Monetary Fund.
In the case of deposit insurance, many countries have raised deposit insurance coverage while some even have provided full coverage in order to curb
bank runs. For example, in October 2008, the U.S.
As the number of
bank runs increased during the Great Depression, government officials acknowledged the role played by expectations in the banking and economic crisis.
By effectively eliminating
bank runs, deposit insurance has the unintended effect of reducing market discipline and increasing incentives for banks to take on risk.
might drag the world into Depression." In May 2002, Adam Posen of the Institute for International Economics raised the alarm that, "the Japanese economy is likely to tumble into crisis sometime before the Diet's supplemental budget process begins in September 2002." This follows Posen's failed March 2001 forecast that financial breakdown, complete with capital flight and possible
bank runs, were "almost inevitable in Japan this year [2001]." Many forecasters warned, despite all the evidence to the contrary, that
bank runs would ensue in the spring of 2002, when the government lifted full guarantees on all time deposits at the banks.
Recently there has been a renewed discussion in the literature about the determinants of
bank runs. Two alternative theoretical explanations are usually provided.
In other words, there is not necessarily a trade-off between the stability and risk-taking arguments; it may be possible to prevent
bank runs without undertaking increased risk associated with moral hazard even under full deposit insurance.
The combination of deposit insurance and a central bank providing discount window credit has made the contagion of
bank runs that often characterized the nineteenth century and the first third of the twentieth century an anachronism.