|
|
|
|
|
|
by mathattack
4151 days ago
|
|
|
I think we agree on 99%. My point is just that a good bank can still have a run in the absence of the FDIC guarantee. Let's say a bank has $100 million in deposits. They keep $10 million in liquid assets, and lend out $90 million in un-securitized loans to local businesses. There's a false market rumor of something bad happening at the bank, and all of a sudden $20 million in depositors want their money back. The bank isn't able to resell the loans quick enough on the secondary market to make up for the shortfall. This could happen. The FDIC guarantee protects the bank because there's no longer a need to have the run - everyone will get paid. |
|
|
Just to clarify, I think we have to distinguish between the likeliness of a bank run and the effects of a bank run.
Indeed, the FDIC makes a bank run extremely unlikely. Perhaps this is what you mean by "protecting the bank".
However, even if there were no FDIC, a bank run on a good (solvent) bank would not cause that bank to collapse, due to the central bank's lender of last resort function.
The bank run would "merely" cause a shrinking of the bank's balance sheet, which the bank would have to offset by selling its assets over time.
It is true that a big change in the balance sheet like that could still lead to the eventual death of the bank, e.g. because the bank has high fixed costs (in the form of physical branches, non-fireable employees, and so on) which can no longer be covered by profits from its regular business. However, this eventual death is (a) not certain since the bank has plenty of opportunity to turn things around and (b) a slow death, very much unlike the sudden implosions that people usually think of when they hear "bank run".