What Is a Bank Panic?

Bank panic refers to the failure of many banks in the banking system. The bank panic reduced the indirect financing activities through banks, caused a reduction in investment and a decline in the level of overall economic activity, and had a severe adverse impact on the economy. At the same time, the failure of banks meant that the interests of depositors were compromised. Bank panic is an information asymmetry between the depositor and the bank. The lack of knowledge of the bank's asset quality information by the depositor will lead to the occurrence of bank panic.

Bank panic

Right!

Bank panic refers to the failure of many banks in the banking system. Bank panic

For example, the economy

Bank panic occurs when the general public lacks confidence in the banking system. Bank panics have a huge destructive effect, interrupting the normal currency creation process of the banking system, disrupting the transmission mechanism of monetary policy, hindering the normal implementation of monetary policy, affecting the effectiveness of government macro-control, and not conducive to the achievement of macroeconomic goals.

Bank panic has the characteristics of simultaneity and large scale. When that happens, the money supply will drop significantly.

Bank panic is not a hypothesis, but a fact. From the 19th century to the 1930s, banking panics in the United States repeatedly occurred, occurring almost every 20 years: 1837, 1857, 1873, 1884, 1893, 1907, 1930--1933. Especially between 1930 and 1933, more than 2,000 banks closed down on average every year.

Bank failures are mainly due to moral hazard issues caused by information asymmetry, that is, banks use the deposits they have absorbed to make high-risk investments, and risky activities have failed to succeed, resulting in bank insolvency. Bank failures left depositors empty of money and suffered losses. One way to prevent this moral hazard problem is for depositors to supervise the activities of banks, and to try to obtain information on banks' high-risk investment activities and stop them (such as withdrawing deposits and leaving banks without funds to take risks) . Unfortunately, it is very difficult for depositors to obtain such information, it is almost impossible to do so, and most depositors cannot restrain banks from engaging in high-risk activities. Obviously, to prevent bank failures, we must rely on the government. The government's supervision of banks must be strengthened to reduce the bank's operating risks, protect the interests of depositors, and protect the safe operation of the economy.