Bank Runs aren’t what they used to be

Subject : Economy

The collapse of crypto exchange FTX; the flood of assets out of Credit Suisse Group AG; the limits on fund redemptions by Blackstone Real Estate Income Trust (BREIT) – they’ve all been characterized as “bank runs” by various economic
Google searches for the term “run on the bank” are hitting levels not seen since the global financial crisis in 2008.

What is Bank run?

A bank run occurs when large groups of depositors withdraw their money from banks simultaneously based on fears that the institution will become insolvent.
With more people withdrawing money, banks will use up their cash reserves and ultimately end up defaulting.
Bank runs have occurred throughout history including during the Great Depression and the 2008-09 financial crisis.
The Federal Deposit Insurance Corporation was established in 1933 in response to a bank run.
In India, Deposit Insurance and Credit Guarantee Corporation is established in 1978 as statutory body.
Silent bank runs occur when funds are withdrawn via electronic transfer instead of in-person.
When compared to bank run, silent bank runs are not visible to everyone as they are taking through electonic mode of withdrawal.

Preventive measures to bank run

The RBI has been bringing out half-yearly Financial Stability Reports (FSR) since 2010, in which one section is exclusively devoted to commercial banking sector.
The central bank as a regulator ensures that banks are prepared to meet these risks.
The Capital to risk assets ratio (CRAR) is a safeguard that the capital base of a bank is not eroded.
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) is a safeguard that a bank is able to return deposits of the customers on demand.
Further, RBI is adopting international standards prescribed by the Basel committee on banking supervision and financial stability board.