5 good questions on "the meaning of money - the problem of bank runs"

What would happen if for some reason, all or most of its depositors did try to withdraw their funds during a couple of days?
  1. The banks would not be able to raise enough cash
  2. because banks convert most of their depositor funds into loans made to borrowers
  3. they would try an sell their loans at a discounted price
  4. they sell off their assets cheaply,
  5. the banks would not be able to pay off its depositors in full
  6. and this leads to a bank failure
How do banks earn revenue?
By charging interest on loans
Are bank loans liquid? Why?
No they are illiquid,
because they cant easily be converted to cash
Why will trying to sell a loan not work for banks during a bank run?
Because potential buyers will be wary, and suspect that the loan wont be repaid,
as a result banks will put a discount on the loans as the only way to sell it
What might start bank runs?
  1. A spreading rumor that the banks is in financial trouble
  2. even the depositors are not sure the rumors are true
  3. they will still get their money out
  4. because other depositors think the bank will fail, they will take their money out
  5. and when all depositors join the rush the banks will fail
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