FINC20019 Money And Capital Market Analysis

Famous Bank Runs

Bank run generally occurs when customers start withdrawing their money because they fear bank is trouble.  This is a herd instinct and all of a sudden all customers panic and this fear spreads like wild fire.  This panic ensues resulting in stampede and even riots.  The bank feels the crash crunch and run out of cash resulting in sudden bankruptcy. Although the financial institution can take some temporary measures to protect itself and it borrows cash from the Government or central banks but this panic kills the financial business.  This psychological herd instinct influences the general decision and judgement of people. A bank run crashes the whole economy as it creates the dominoes effect – one bank knocking the other and ultimately the panic damages the entire economy of the nation (Market Business News, 2018).

Panic of 1907

• The panic of 1907 was caused by a blunder of Otto Heinze who was the brother of giant in the copper industry in America F. Augustus Heinze. Otto’s attempts to squeeze borrowed stocks of copper misfired terribly resulting in running both the brothers in bankruptcy of their brokerage house. The people were already feeling the brunt of recession and other economic problems due to the earthquake in San Francisco.  The rumors that banks are in trouble spread, prompting frenzy of everyone.  Ultimately J.P. Morgan and other banks took hold of the banking reigns and calmed down everything.  This crisis gave birth to National Reserve Bank to handle such type of crisis.

The 1929 Wall Street Crash

• This was the greatest disaster in the history of Americans as it led to 12-years of Great Depression. This happened due to the crash in stock market caused by the concept of marginal purchase which means people who could not afford bought stocks on margin means with the help from brokerage. This means that people paid only 10% to 20% and the broker paid 80% to 90%.  On March 25, 1929, the market dipped and people panicked as they received margin calls.  This was the warning bell which was followed by Black Thursday on October 24, 1929, Black Monday, and Black Tuesday was the apocalyptic day when shares worth 16.4 million were sold resulting in impending major crash.  The aftershocks of this lasted for more than two years.  People lost trust in bank and several people committed suicides due to the losses.

The Argentinian Debacle

• The rampant corruption in the Argentina government increased debts resulting in revaluation of currency exchange which led to perpetual halt of exports. This was followed by mass unemployment and increased inflation. People loss faith and this caused massive bank run (WealthHow, 2018).

Causes of Bank Runs

• Individual liquidity stock -Individual suffers liquidity shock due to loss of earnings, health issues, natural disasters, etc.
• Bad loans- All investments are not successful. When borrowers do not return their loans
• Bank Losses- Bank incurs losses due to lack of internal funds. Bank becomes a borrower.

Banks run on depositor’s money and if depositors withdraw money all at a time even a sound financial institution can sin.

Bank run can be prevented in three ways discussed below (NPR, 2012):

• Slow it down: Allowing tiny withdrawals can help to slow down the bank run. In extreme cases banks shut down to prevent pulling off the money
• Borrow Money: In a bank run people panic and run for withdrawing their money. In such instances, banks can borrow money to prevent the run
• Insure people’s deposits: Insurance of the deposits has ended bank runs. It is a promise, an insurance that banks give that even if it runs out of money, it will pay back their customers