--%>
Assignment Help - homework help

Banking crisis on checkable deposits

Question:

Some developing countries have suffered banking crises in which depositors lost part or all of their deposits (in some countries there is no deposit insurance). This type of crisis decreases depositors' confidence in the banking system. What would be the effect of a rumor about a banking crisis on checkable deposits in such a country? What would be the effect of on reserves and the monetary base?

Answer:

The depositors of the country under consideration have faced this kind of crisis in the past, as mentioned in the question. Therefore, their confidence level in the banking system is not very high due to past experiences.

Now suppose there is a rumor that one or two banks are facing crisis on the checkable deposit accounts. This will probably lead to a bank run. A bank run happens when the depositors lose trust in the banking system and all the depositors line up at the same time to withdraw their deposits. In this case also, a rumor will lead all the depositors to try and withdraw all their deposits. Under this scenario, all the banks which do not have enough excess reserves will fail. Even the banks with sufficient reserves will be in troubled waters as paying back the entire deposits is simply not possible for a bank in one go, as most of the assets of the banks lie as loans, which cannot be called back at a such a short notice.

The central bank of the country will step in to control the situation by lending to the banks in order to meet their deposits obligations. This will mean that one hand the bank reserves deplete and on the other, their liabilities vis-à-vis the central banks decrease. Also, since the banks' excess fall steeply, as discussed above. So overall, there would be a steep fall in the monetary base. 

   Related Questions in Business Economics

  • Q : U.S. exports create a demand for

    True or false? “U.S. exports create a demand for foreign currencies; foreign imports of U.S. goods generate supplies of foreign currencies.”  Explain.

    		•
  • Q : Activities of speculators in long turn

    The activities of speculators tend to, in the long run: (w) decrease the volatility of prices. (x) attract legal attention resulting in imprisonment. (y) increase the level and volatility of prices. (z) yield tremendous profits and raise costs to cons

    		•
  • Q : Describe Financial Leverage Briefly

    Briefly describe Financial Leverage? In what manner it is calculated? What does low or high financial leverage signify?

    		•
  • Q : Internal factors which influencing the

    Write down the internal factors which influencing the capital structure?

    		•
  • Q : Perfect competition and efficiency

    Which of the given describes a condition in which a good or service is produced at the lowest probable cost: w) productive efficiency. x) allocative efficiency. y) marginal efficiency. z) profit maximization Please

    		•
  • Q : Example of self interest to define

    The concept of _____ was demonstrated by _____ along with the quotation, “The defeat of a bit finger would remain the average European from sleeping which night,... but, given he never saw them, he will snore along with the most profound security over the loss o

    		•
  • Q : Economic sense production methods

    Evaluate and explain the statements: “In the economic sense production methods are the most efficient methods, once resource prices are considered and are lesser in sense of engineering”.

    		•
  • Q : What are the determinants of demand

    What are the determinants of demand?

    		•
  • Q : Introduction of the term Cost Principle

    Give a brief introduction of the term Cost Principle ?

    		•
  • Q : Conception of the Invisible Hand by

    Conception of the “Invisible Hand” by Adam Smith relies on mechanisms like those as underpin: (1) William Stanley Jevons’ “sunspot” theory of business cycles. (2) the biological concept of Homeostasis. (3

    		•