Run on the Banks

Aspectre that has always haunted the banking industry is the fear of a bank run. But unfortunately, the regulators have been unable to resolve this issue despite continuous efforts. The challenges became very acute towards the end of the 19th century when bank runs caused the failure of hundreds of banks in the United States (US). Today, more than a century later, bank runs continue to regularly crop up even under the watch of experienced regulators, albeit on a smaller scale. The recent bank runs in the US and the financial turmoil are a testimony to this.

Though the theories about the reason for bank runs and bank failures have evolved over the years, the debates on their optimum regulation continue to be actively pursued. One reason for this is the unfounded faith of the free marketeers in the self-correcting nature of the markets and the ability of financial institutions to protect themselves. They argue against strong regulations claiming that excessive regulations will stifle innovation and that self-preservation instincts would prevent banks from taking excessive risks.