Bank Regulation

Self-Check Questions

Given the danger of bank runs, why do banks not keep the majority of deposits on hand to meet the demands of depositors?

Hint:

Banks make their money from issuing loans and charging interest. The more money that is stored in the bank’s vault, the less is available for lending and the less money the bank stands to make.

Bank runs are often described as “self-fulfilling prophecies.” Why is this phrase appropriate to bank runs?

Hint:

The fear and uncertainty created by the suggestion that a bank might fail can lead depositors to withdraw their money. If many depositors do this at the same time, the bank may not be able to meet their demands and will, indeed, fail.