The process by which simultaneous withdrawals by a particular bank’s depositors results in the bank closing is known as a Group of answer choices
A bank panic.
B contagion.
C bank run.
D financial crisis.
The correct answer and explanation is:
The correct answer is C) bank run.
A bank run occurs when a large number of a bank’s depositors simultaneously withdraw their funds due to concerns about the bank’s solvency or financial stability. Depositors fear that the bank may not have enough reserves to meet the demand for withdrawals, so they rush to take their money out before it is too late. This sudden surge in withdrawals can cause a liquidity crisis for the bank, even if it is financially solvent in the long term. A bank’s reserves are typically lower than the total value of deposits since banks lend out a significant portion of their deposits to earn interest. In times of crisis, these reserves may not be enough to satisfy the demand, leading to the bank’s closure or bankruptcy.
Bank runs are historically associated with periods of financial instability. The most infamous example is the Great Depression in the 1930s, where many banks were forced to close after mass withdrawals by panicked depositors. To prevent such occurrences, modern banking systems have protections like the Federal Deposit Insurance Corporation (FDIC) in the United States, which insures depositors’ funds up to a certain amount, thus reducing the risk of a bank run. Despite this, in less regulated or emerging economies, bank runs can still happen if trust in the banking system is shaken, often by fears of insolvency, poor management, or external financial crises.
Bank runs can be contagious; one bank’s closure or suspected collapse can trigger panic at other banks, leading to further withdrawals and additional closures. Therefore, the term “bank run” is specifically used to describe the withdrawal of funds from one bank, while “contagion” refers to the broader spread of panic to other banks.