Explain how a bank run can turn into a bank panic. Bank runs occur when people f

Question

Explain how a bank run can turn into a bank panic.

Bank runs occur when people fear that their bank has become   (Click to select)insolventilliquid . Depositors rush to their bank to withdraw their funds. Depositors at other banks become concerned about their own bank’s   (Click to select)solvencyliquidity , so they also hurry to withdraw their funds. Bank runs can turn into system-wide bank panics because customers have a difficult time distinguishing   (Click to select)insolventilliquid    banks from (Click to select)solventliquid ones.

Explanation / Answer

1) bank has become insolvent(unable to pay depositors)

2) depositors are concerned about their own bank's solvency

3)customers have difficult time distinguishing insolvent banks from solvent banks

explanation: if bad loans of a bank accumulates , it wipes offf the shareholder's equity. The assets of bank becomes less than its liabilities.Even if the banlk sold all its assets,it would still be unable to repay all depositors. The bank is now insolvent and there is a bank run.

illiquid means that you dont have resources available to meet your current obligation.illiquid assets you own cannot be liquidated easily

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.