I’m all right, Jack
A ‘bank run’ always gives me a reassuring feeling that my base understanding of financial markets is essentially unchallengable: what happens in markets is the consequence of self-interested human behaviour and very little else.
In the case of a bank run, a hint that a bank may be in trouble (or even Robert Peston broadcasting the suggestion that it is, as with the Northern Rock – remember that?), will panic depositors in a race to be first in the queue to get THEIR money out. As no bank can make a profit by holding all its assets in cash or near cash, it will struggle to meet withdrawal requests when they amount to more than a small percentage of its assets, so it will have to immediately sell its first reserve assets, like government securities, and the fact that it is selling and why will quickly become known, meaning the panic will widen and it may only be able to sell at fire sale prices.
Of course, many assets of a bank, like loans, mortgages or investments cannot be realised quickly and the vultures, in the form of larger competitors, will start circling immediately, looking to scavenge some cheap assets and pick up blocks of customers for nothing.
These days most private depositors in banks or equivalent deposit takers like UK Building Societies will be protected to a large extent by state deposit insurance schemes, but the bank’s shareholders, bondholders and those with very large deposits will not be (eg corporations). In 2008, the shareholders and bondholders were largely bailed out by governments because the crisis was based on underlying failings in the system and inadequate regulation and the only option was a repeat of the Great Depression.
This time, they won’t be, although all depositors are getting protection in the USA (a Main Street, not Wall Street, solution). The cost of this extended cover will be born by the other banks – they have copied the UK Financial Services Compensation Scheme!
