Question

i) What is a banking panic?

ii) What commercial banks did in order to stop a potential banking panic?

iii) Is it one of the duties from Central Banks to attend commercial bank´s SOLVENCY problems?

Answer 1

1) A banking panic is a situation which occurs when a large number of bank's customers start withdrawing their deposits simultaneously with the fear that the bank might stop functioning in near future.It is also called bank run,because bank run is basically thr result of a panic rather than true insolvency of bank.Actually, it triggers the actual insolvency when people start withdrawing money from bank.

2) As banking panic results in actual insolvency of banks, the commercial banks can stop a potential banking panic by the following ways-----

*They must shut down for some time to prevent depositors from withdrawing money.

* Insurance of customers deposits is a good way to ensure the security of customers' deposits.So, the banks must insure the customer's deposits.

* Banks must arrange loans,or other borrowing to ensure sufficient funds/ reserves with themselves in order to ensure customers that they have sufficient Reserves.

3) Yes, it is the duty of central bank to tackle the solvency problem of commercial banks.

Being The lender of last Resort ,the centrAl bank -------

* Offers extension of credit to banks whenever they are running financial difficult

* helps commercial banks in boosting their confidence in banking system

* helps commercial banks when ever they need funds especially when they run shortage of required reserves.

* Reassures bank customers or depositors that their money is safe and help to prevent bank run.

This way, central bank personally intervenes and provide moral and financial support to commercial banks whenever they run into solvency problems.