--%>
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 : Briefly state the pros and cons of

    Briefly state the pros and cons of Proprietorship?

    		•
  • Q : Numbers of sellers in pure competition?

    numbers of sellers in pure competition?

    		•
  • Q : Calculate Equilibrium Quantity and Price

    1. The owner of a firm calculates that next year's profit will be $1,000. Each successive year profit will increase by 10% (i.e. year 2: $1100; year 3: $1210 and so on.) At the end of the 5th year the firm could be sold for $20,000. A) if the appropriate di

    		•
  • Q : Perfect competition leads the economic

    The perfectly competitive market structure benefits consumers since: w) firms do not generate goods at the lowest possible price within the long run. x) firms are forced through competitive pressure to be as efficient as possible. y) firms add a much

    		•
  • Q : Explain Self-interest of the Market

    Explain Self-interest of the Market System?

    		•
  • Q : Fruit Question: Read the following

    Question: Read the following excerpts from the article "Fruit, veg costs surge' by Todd, Dagwell, published in the Herald on January 25th 2011 and answer questions below:

    Q : Illustrate 2nd function to promote and

    Illustrate the 2nd function to promote and maintain competition?

    		•
  • Q : Production possibility frontier

    Question: Scenario: You have been hired as the economics adviser for the newly elected State Premier. On your first day, the Premier introduces you to the new Minister for Health

    		•
  • Q : Estimate the impact of education on

    Using a random sample of 670 individuals for the population of people in the workforce in 1976, we want to estimate the impact of education on wages. Let wage denote hourly wage in 1976 U.S. dollars and let educ denote years of schooling. We obtain the following OLS regression line: wage = -0.54

    		•
  • Q : Type of expenditure at the local level

    What is the most important source of revenue and the major type of expenditure at the local level?

    		•