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 depositors try to withdraw their funds, banks may not have enough reserves to satisfy all the withdrawal requests, leading to a potential collapse of the bank. This also results in a decrease in the money supply and contraction of the money multiplier. The Federal Reserve can intervene to prevent or mitigate bank runs through various tools such as providing liquidity support or injecting funds into the banking system. Insolvent banks are more vulnerable to bank runs, but even solvent banks can face the risk of bank runs if there is a loss of confidence among depositors.

Bank Runs