In this video I’m going to be focusing on “Bank Runs” – I’ve actually done a video very similar to this one before, but I felt it was necessary to revisit this topic because of what has happened in Canada recently. Also, I believe that I’m right in saying that Poland has seen people withdrawing cash due to the unfolding events in Ukraine.
Forgive me if any of this is entirely evident to you already. My intention is not to be patronising.
In order to avoid any confusion, or misunderstanding, it’s best that everything gets explicitly expressed and stated as clearly as is possible.
How do they happen?
So, how do Bank runs happen? Bank Runs happen basically because people are concerned about losing their money. They rush to the bank to withdraw cash.
But there is a lot more to it that this. Bank runs typically occur during a financial crisis, or if, for whatever reason, there is an increased level of uncertainty.
There‘s a lot of uncertainly around at present. There’s also lots of tension in respect of politics, society and economics which have to be factored into the equation.
I should also say that trust and confidence are extremely important issues when it comes to Economics. These factors are often overlooked, but they become much more apparent in troubled times. The situation can be likened to when you sustain an injury. Say if you’ve hurt your back, you realise how essential your back is in carrying out everyday tasks, where before you’ve just taken it for granted. The same is true with trust and confidence.
Northern Rock example
Let’s look at a relatively recent example of a bank run - besides Canada.
In Britain, during the financial crisis 2007 / 2008, the high street bank Northern Rock found itself in trouble due its having made some bad strategy decisions in the years prior. The BBC nightly news programme announced that Northern Rock had turned to the Bank of England for financial support and, the very next day, there were queues of people outside branches trying to withdraw money. It was the first bank run in Britain in 150 years. The bank was Nationalised a few months later in order to save it.
So bank runs can happen all of a sudden.
Moving on …
Two important issues
When it comes to Bank Runs, there are two important issues that everyone needs to be aware of.
The first is amount of “cash” in an economy. The second is “Fractional Reserve Banking”.
Let’s tackle these one after the other and then we can consider the ramifications and look at the banks likely responses.
“cash”
Let’s start by talking about “Cash” in an Economy.
First off, I have to define what I mean when I say, Cash. It should be fairly obvious, but just for the sake of clarity, I’m basically talking about the physical paper money and metal coins in circulation – the ones we use every day in stores and such like. So, this includes all the bank notes and all the coins of whatever denomination. I shall refer to these notes and coins from now on simply as “cash
