Bank runs

Question

Bank runs

Quizplus · Accepted Answer

Bank runs are a problem because banks only hold a fraction of deposits as reserves. As more and more depositors withdraw their funds, banks may not have enough reserves to meet all the withdrawal requests, leading to a cascade of bank failures. This is why bank runs can be prevented by ensuring that banks hold enough reserves to meet potential withdrawal demands. The Federal Reserve can also help alleviate bank runs by providing liquidity to banks that are facing a funding shortfall.

Bank Runs