Talk:Bank run

Dr. Molyneux's comment on this article

Dr. Molyneux has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Ist para - change this

and keep the cash or transfer into other assets, such as government bonds, precious metals or stones.

TO

and keep the cash or transfer into other assets that they believe to be safer than bank deposits, such as government bonds, precious metals or stones.

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Dr. Molyneux has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference 1: Fiordelisi, Franco & Marques-Ibanez, David & Molyneux, Phil, 2010. "Efficiency and risk in european banking," Working Paper Series 1211, European Central Bank.

• Reference 2: Delis, Manthos D & Molyneux, Philip & Pasiouras, Fotios, 2009. "Regulations and productivity growth in banking," MPRA Paper 13891, University Library of Munich, Germany.

ExpertIdeasBot (talk) 13:31, 11 June 2016 (UTC)

Dr. Faia's comment on this article

Dr. Faia has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Bank runs in this article are described only as liquidity based (Diamond and Dybvig theory). Influential research has shown that data evidence supports the hypothesis of fundamental based bank runs, namely bank runs not triggered (solely) by unpredictable idiosyncratic shocks to depositors' discount factor or preferences or by coordination failures, but triggered by the banks' or the economy' fundamentals (see Gorton, Gary, 1988, Banking panics and business cycles, Oxford Economic Papers,40, 751–781 and Kaminsky, Garciela L., and Carmen M. Reinhart, 1999, The twin crises: The causes of banking and balance-of-payments problems, American Economic Review,89, 473–500). The hypothesis of fundamental bank runs and its consequences for the economy have been modelled by Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December and by Faia, E. and I. Angeloni, Capital Regulation and Monetary Policy with Fragile Banks, with I. Angeloni. Journal of Monetary Economics, lead article, 60, 3, 311-382, April 2013.).

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Faia has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Angeloni, Ignazio & Faia, Ester & Lo Duca, Marco, 2013. "Monetary policy and risk taking," SAFE Working Paper Series 8, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

ExpertIdeasBot (talk) 18:21, 27 June 2016 (UTC)

Dr. Angeloni's comment on this article

Dr. Angeloni has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The article does not mention the possibility that bank runs arise also from fundamental forces beyond depositors liquidity shocks and/or informationl coordination failures. There is much evidence that bank runs are often linked to weak fundamentals (see Kaminsky, G.L. and C. M. Reinhart (1999). The Twin Crises: the Causes of Banking and Balance-of-Payment Problems", American Economic Review, vol 89, no 3, June,pp 473-500.). Moreover in environment with low interest rates and cheap liquidity banks tend to leverage excessively through demandable deposits (risk taking on the liability side). This practice exposes them to the risk of bank runs as investors hear news that some shocks have reduces banks assets' values (see Angeloni, I. and Faia, E. Capital Regulation and Monetary Policy with Fragile Banks, Journal of Monetary Economics, lead article, 60, 3, 311-382, April 2013).

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Angeloni has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Angeloni, Ignazio & Faia, Ester & Lo Duca, Marco, 2013. "Monetary policy and risk taking," SAFE Working Paper Series 8, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

ExpertIdeasBot (talk) 18:32, 27 June 2016 (UTC)

Dr. Wall's comment on this article

Dr. Wall has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

These are the items that most need to be fixed. There are other smaller issues but they can be addressed after these are fixed.

As an overview, the introduction of the article is a not terrible discussion of banking runs in the 1800s but it is very misleading about banking runs in the 2000s.

Comment 1. "A bank run (also known as a run on the bank) occurs when, in a fractional-reserve banking system (where banks normally only keep a small proportion of their assets as cash), a large number of customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvent; and keep the cash or transfer into other assets, such as government bonds, precious metals or stones. When they transfer funds to another institution it may be characterised as a capital flight."

This definition of a bank run that restricts it to withdrawals into cash is more narrow than how the term is normally used in contemporary discussions. The bank runs in the late 1800s were often characterized by currency withdrawals. However, in more modern times bank runs often take the form of depositors transferring their funds to another bank. (Indeed, the size of large institutional deposits is so large that withdrawing currency is not a practical option without lots of advance planning. As an example of how a bank run is ordinarily defined, the introduction to the Diamond and Dybvig article (footnote 13) says "During a bank run, depositors rush to withdraw their deposits because they expect the bank to fail." (The withdrawals in their model are not put in another bank because their model only has one bank. However, the introduction to their paper talks about the potential for runs in the Eurodollar market and these deposits are generally far too large to be withdrawn as currency).

The above quote from the Wikipedia article does address the issue of transferring funds to another institution but it mistakenly calls that "capital flight." However, we do not ordinarily use the term "capital flight" to refer to large scale deposit transfers from one bank to another. Rather, the Wikipedia article on "Capital flight" gives the correct definition: "Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence." I would recommend either leaving out the discussion of capital flight.

Comment 2 "To combat a bank run, a bank may limit how much cash each customer may withdraw, suspend withdrawals altogether, or promptly acquire more cash from other banks or from the central bank, besides other measures."

At one time banks might suspend payment of deposits in specie (gold). However, suspending withdrawals of maturing deposits and/or demand deposits is grounds for the bank supervisors to withdraw a bank's charter. See 12 CFR 627.2710 which explicitly lists inability to make a timely payment of principal or interest as grounds for the FDIC to be appointed as conservator or receiver.

Comment 3 “A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time, as people suddenly try to convert their threatened deposits into cash or try to get out of their domestic banking system altogether.”

Again, withdrawals into cash are rare. From a macroeconomic perspective, the effect of cash withdrawals (as opposed to deposit transfers) was trivial during the 2007-09 period.

Comment 4 “ A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out.”

This definition of systemic banking crisis is the one used in the article that’s being referenced but it’s not necessarily the only definition. One could have a systemic banking crisis in which only some banks are insolvent but their functioning is critical to the provision of some banking service, such as the payments system. Moreover, this statement can easily be misunderstood in an article on bank runs. What the article being referenced is talking about is the value of the bank’s equity (assets – liabilities). A bank panic is concerned with a related but different issue—deposit withdrawals that exceed a bank’s ability to obtain replacement funding (via liquidating existing assets or borrowing from someone else).

Comment 5 “Several techniques have been used to try to prevent bank runs or mitigate their effects. They have included a higher reserve requirement (requiring banks to keep more of their reserves as cash), government bailouts of banks, supervision and regulation of commercial banks, the organization of central banks that act as a lender of last resort, the protection of deposit insurance systems such as the U.S. Federal Deposit Insurance Corporation,[1] and after a run has started, a temporary suspension of withdrawals.”

Reserve requirements are not a useful tool for mitigating bank runs as banks cannot draw these buffers without getting into trouble with the regulators. However, the bank regulators have recently adopted the liquidity coverage ratio as a part of Basel III that are intended to force banks to better able to withstand bank runs. See the Basel Committee on Banking Supervision, “ Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” at http://www.bis.org/publ/bcbs238.pdf.

Also suspension of withdrawals was one way of reducing the risk of bank runs. But it wasn’t used very much (or at all) during the crisis.

Comment 6 “Other examples are the Dutch Tulip manias (1634–1637), the British South Sea Bubble (1717–1719), the French Mississippi Company (1717–1720), the post-Napoleonic depression (1815–1830) and the Great Depression (1929–1939).”

All of these should be supported with links to articles talking about bank runs associated with these events (excepting for the Great Depression). The related Wikipedia articles talk about potential bank distress but most don’t reference bank runs as being an important part of the story.

Comment 7

The section labeled “Theory”.

This section focuses exclusively on one very influential model of bank runs, one by Diamond and Dybvig. However, in there model banks would have sufficient assets to meet all withdrawals if some depositors did not become concerned that others were going to withdraw prematurely causing the bank to fail. As there is no fundamental reason for depositors to become concerned about a run by other depositors, Diamond and Dybvig is sometimes referred to as a “sunspot” model (indeed the Wikipedia article on “Sunsupots (economics)” uses Diamond and Dybvig as one of its exampls.

The problem with talking exclusively about a sunspot model is that it is inconsistent with the first paragraph which says runs start because investors think their institution may be insolvent. More importantly, many academic studies have found that banks that are run were often insolvent (or very close to insolvent) before the deposit run started. As one example of a study that found that fundamentals (a decline in the value of bank assets) was the cause of most runs during the Great Depression see Charles W. Calomiris and Joseph R. Mason, “Fundamentals, Panics, and Bank Distress during the Depression”. American Economic Review, Vol. 93, No. 5 (Dec., 2003), pp. 1615-1647. I recommend more discussion of the evidence that bank runs are (mostly) a result of a prior decline in the value of the bank’s assets.

Comment 8 “A silent run occurs when the implicit fiscal deficit from a government's unbooked loss exposure[clarification needed] to zombie banks is large enough to deter depositors of those banks.”

This statement is completely wrong. The Investopedia provides a more accurate definition at http://www.investopedia.com/terms/s/silent-bank-run.asp:

“A situation in which a bank's depositors withdraw funds en masse without physically entering the bank. A silent bank run is much like a normal bank run, except withdrawals are made by customers in the form of electronic fund transfers and wire transfers, rather than going into the bank and withdrawing cash or a bank draft. As banking has become more and more automated, the electronic movement of funds from one institution to another has become more common.”

I drop this paragraph and move the discussion of a silent bank run into the introduction. Some discussion of silent bank runs is needed because that’s the real threat to the very large, systemically important banks. The high profile runs where depositors lined up outside banks occurred at large banks but ones that were not necessarily systemically important by themselves.

Comment 9 “A bank may try to slow down the bank run by artificially slowing the process. One technique is to get a large number of friends and family of bank employees to stand in line and make a large number of small, slow transactions.[22]

Scheduling prominent deliveries of cash can convince participants in a bank run that there is no need to withdraw deposits hastily.[22]”

These are techniques that may work to slow retail deposit withdrawals. However, with deposit insurance the real threat to banks is the withdrawal of large deposits, especially via “silent runs”. I would drop these two points. I would replace them with a discussion of the liquidity coverage ratio (see reference at comment 5).

Comment 10 “A bank can temporarily suspend withdrawals to stop a run; this is called suspension of convertibility. In many cases the threat of suspension prevents the run, which means the threat need not be carried out.[1]”

This was something that could be done in some circumstances prior to the creation of deposit insurance. However, as noted above, an individual bank that tries this is liable to be resolved by the FDIC (That is the FDIC will assume control of the bank. The FDIC will either sell the closed bank to another stronger bank or liquidate the closed bank.) A modern example of such a suspension is Cyprus http://worldnews.nbcnews.com/_news/2013/03/18/17355675-cyprus-banks-ordered-closed-to-halt-panic-withdrawals . But this suspension had lasting, adverse consequences for Cyprus so its not something governments like to do.

I would also add a reference to borrowing at the central bank, such as at the Federal Reserve’s discount window. This discount window can play an important role if a systemic crisis (as noted later in this article) but the discount window is also available to provide funds even if only one bank is being run (provided the bank is solvent). Note, the Wikipedia article on the discount window is weak (for example, it doesn’t have much about the discount window before 2000 nor does it discuss the changes made by the Dodd-Frank Act after the crisis).

Comment 11 “Emergency acquisition of a vulnerable bank by another instititution with stronger capital reserves. This technique is commonly used by the U.S. Federal Deposit Insurance Corporation to dispose of insolvent banks, rather than paying depositors directly from its own funds.[23]

If there is no immediate prospective buyer for a failing institution, a regulator or deposit insurer may set up a bridge bank which operates temporarily until the business can be liquidated or sold.

To clean up after a bank failure, the government may set up a "bad bank", which is a new government-run asset management corporation that buys individual nonperforming assets from one or more private banks, reducing the proportion of junk bonds in their asset pools, and then acts as the creditor in the insolvency cases that follow. This, however, creates a moral hazard problem, essentially subsidizing bankruptcy: temporarily underperforming debtors can be forced to file for bankruptcy in order to make them eligible to be sold to the bad bank.”

These are more discussions of what can be done after a bank has failed (perhaps due in part to a bank run) and been taken over by the FDIC. I would replace these three with something indicating that a bank run may lead to the bank failing and being taken over by the FDIC for resolution and then link to the Wikipedia article on the FDIC.

Comment 12 “A less severe alternative to full-reserve banking is a reserve ratio requirement, which limits the proportion of deposits which a bank can lend out, making it less likely for a bank run to start, as more reserves will be available to satisfy the demands of depositors.[6] This practice sets a limit on the fraction in fractional-reserve banking.”

As noted in comment 5 above, reserve requirements are not a useful tool for dealing with bank runs. However, the related tool of the liquidity coverage ratio is intended to make banks much less vulnerable to runs (at least in the short-run).

Comment 13 “Transparency may help prevent crises spreading through the banking system. In the context of the recent crisis, the extreme complexity of certain types of assets made it difficult for market participants to assess which financial institutions would survive, which amplified the crisis by making most institutions very reluctant to lend to one another.[citation needed]”

This paragraph appears to contradict an earlier paragraph which said a way for an individual bank to avoid being run is to become less transparent.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Wall has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Jens Hagendorff & Maria J. Nieto & Larry D. Wall, 2012. "The safety and soundness effects of bank M&As in the EU: does prudential regulation have any impact?," Banco de Espaa Working Papers 1236, Banco de Espaa.

ExpertIdeasBot (talk) 18:53, 30 August 2016 (UTC)

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