Macroeconomics Project BM0008 Ms Eileen Ng

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Macroeconomics ProjectBM0008Ms Eileen Ng

• Topic
• Bank Run
• ICA 2 (15)

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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.

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Factors that cause Bank Run to occur

• Individual liquidity shock
• bad loans factor
• bank losses factor

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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

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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

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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

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Bad loans factor
Red Card! For Not Paying Your Loans To The Bank.

• 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,

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Bad Loan Factor
Thats For Encouraging Withdrawals Of Money!

• 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.

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Bank losses factor
Bank Losses Affect Our Economy.

• Similarly with any other companies, banks require
  funds for their daily operations .
• When a banks costs are greater than their
  income, there is a tendency that the bank would
  become bankrupt

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Bank losses factor
How Can We Help Our Economy...

• 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.

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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.

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Expansionary Fiscal Policy
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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.

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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

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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.

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Done By

• Anson Koh
• Weng Zhaoqin
• Ong Tian Sheng
• Khoo Yong Liang 041415E
• Lee Weihan
• Woo Zhi Ren
• Tutor Ms. Eileen Ng