Bank Runs are Proof that Banks aren’t always Stable

Banks are often thought to be reliable financial institutions that take care of the interests of its customers. However, these seemingly stable establishments can fail under the wrong circumstances.

When banks go under, they are no longer able to meet their obligations like providing cash when depositors demand it. Today, we will look into why bank runs are proof that banks aren’t always stable as you might think.

Bank Runs Explained

A run on a bank or bank run is an event where bank depositors try to withdraw more money from a bank than it can provide. It is usually a result of people’s fear and panic that their bank might be insolvent. As more people attempt to withdraw their deposits, the probability of default increases and can lead to actual insolvency. When several banks experience a bank run, a banking panic ensues.

Bank runs have happened in the past and are still happening today. During the Argentine economic crisis particularly in 2001, Argentina experienced a bank run which even poured over to bank runs un Uruguay in 2002. During this time, people realized that the system did not have enough money supply to cover all deposits which prompted the intensification of the run.

The government then controlled the outflow of deposits by limiting the number of cash people can withdraw and by only allowing money transfers within the banking system. This results in a monetary crash and then to a collapse of economic activity..

Why Bank Runs Happen?

There are many causes of bank runs but ultimately, it begins with a fear of loss. When people fear that they’ll lose their money in the bank due to economic turmoil, their natural reaction is to secure their hard-earned savings and withdraw their deposits.

Another culprit for bank runs is fractional reserve banking. Under this system, banks store 10 percent or less only of their depositor’s money in their vaults under the presumption that not all depositors would want to withdraw their funds at the same time. The remaining 90 percent of deposits are lent to borrowers or are used to invest in financial markets. During a bank run, banks may not have enough money to cover all withdrawals which leads to trouble down the road.

Bank runs can be self-fulfilling in nature. Banks become unstable when all its depositors pull out funds at the same time but even more so when it is forced to generate cash by selling its investments at an inconvenient time like a financial crisis. The likelihood of insolvency increases and greater panic ensues.

Private Security Boxes Against Bank Runs

Bank runs are proof that banks aren’t always stable. If they’ve happened in other parts of the world then it can happen in Australia as well.

So in order to protect your wealth, you need to be smart about where you put your assets. If you truly want to keep your hard-earned money safe from the repercussions of our unsecured economy, you need to rely on a solution that does not rely on the current financial system.

This is where Private Vaults Australia can help you. We offer a wide range of safety deposit boxes which you can use for gold or bullion storage and keep all your other physical assets such as precious gems, stock bonds, and more.

We not only guarantee the first-class protection for your valuable assets but also offer an intimate, considerate and premium customer service. Call us for more information about our security vault services at 1300 888 782.

YouTube Video:

Register now to receive our opening offer - 3 Months Free on your first year, limited spots are available

Share This