Editing Bank run (section)

==Prevention and mitigation==
[[Image:Northern Rock Queue.jpg|thumb|right|[[Nationalisation of Northern Rock#Run on the bank|2007 run on Northern Rock]], a UK bank, during the [[2008 financial crisis]]]]
[[File:Response of malicious rumours of BEA on 24 Sept 2008.jpg|thumbnail|A run on a [[Bank of East Asia]] branch in Hong Kong, caused by "malicious rumours" in 2008]]

Several techniques have been used to help prevent or mitigate bank runs.

=== Individual banks ===
Some prevention techniques apply to individual banks, independently of the rest of the economy.
* Banks often project an appearance of stability, with solid architecture and conservative dress.<ref name="planet_money">{{cite news|agency=NPR|url=https://www.npr.org/templates/transcript/transcript.php?storyId=154719542|title=Three Ways To Stop A Bank Run|date=2012-06-11|author=Zoe Chase}}</ref>
* A bank may try to hide information that might spark a run.<!-- ref name=Diamond2007 --> For example, in the days before deposit insurance, it made sense for a bank to have a large lobby and fast service, to prevent the formation of a line of depositors extending out into the street which might cause passers-by to infer a bank run.<ref name=Diamond2007/>
* A bank may try to slow down the bank run by artificially slowing the process. One technique is to get a large number of friends and relatives of bank employees to stand in line and make many small, slow transactions.<ref name="planet_money" />
* Scheduling prominent deliveries of cash can convince participants in a bank run that there is no need to withdraw deposits hastily.<ref name="planet_money" />
* Banks can encourage customers to make [[term deposit]]s that cannot be withdrawn on demand. If term deposits form a high enough percentage of a bank's liabilities, its vulnerability to bank runs will be reduced considerably. The drawback is that banks have to pay a higher interest rate on term deposits.
* A bank can temporarily suspend withdrawals to stop a run; this is called ''suspension of convertibility''. In many cases, the threat of suspension prevents the run, which means the threat need not be carried out.<ref name=Diamond2007/>
* Emergency acquisition of a vulnerable bank by another institution with stronger capital reserves. This technique is commonly used by the U.S. [[Federal Deposit Insurance Corporation]] to dispose of insolvent banks, rather than paying depositors directly from its own funds.<ref name="anatomy">{{cite news|url=https://www.npr.org/templates/story/story.php?storyId=102384657|date=2009-03-26|title=Anatomy Of A Bank Takeover|agency=NPR|author=Chana Joffe-Walt}}</ref>
* If there is no immediate prospective buyer for a failing institution, a regulator or deposit insurer may set up a [[bridge bank]] which operates temporarily until the business can be liquidated or sold.
* To clean up after a bank failure, the government may set up a "[[bad bank]]", which is a new government-run asset management corporation that buys individual nonperforming assets from one or more private banks, reducing the proportion of junk bonds in their asset pools, and then acts as the creditor in the insolvency cases that follow. This, however, creates a [[moral hazard]] problem, essentially subsidizing bankruptcy: temporarily underperforming debtors can be forced to file for bankruptcy in order to make them eligible to be sold to the bad bank.

=== Systemic techniques ===
Some prevention techniques apply across the whole economy, though they may still allow individual institutions to fail.<!-- ref name=Brusco -->
* [[Deposit insurance]] systems insure each depositor up to a certain amount, so that depositors' savings are protected even if the bank fails. This removes the incentive to withdraw one's deposits simply because others are withdrawing theirs.<ref name=Diamond2007/> However, depositors may still be motivated by fears they may lack immediate access to deposits during a bank reorganization.<ref name="WaMu-LAT">{{cite news |author= Reckard, E. S. |author2=Hsu, T. |title= U.S. engineers sale of WaMu to JPMorgan |work= Los Angeles Times |date=2008-09-26 |access-date=2008-09-26 |url=http://www.latimes.com/business/la-fi-wamu26-2008sep26,0,614943.story}}</ref>  To avoid such fears triggering a run, the U.S. FDIC keeps its takeover operations secret, and re-opens branches under new ownership on the next business day.<ref name="anatomy" />  Government deposit insurance programs can be ineffective if the government itself is perceived to be running short of cash.<ref name="planet_money" />
* Bank [[capital requirement]]s reduces the possibility that a bank becomes insolvent. The [[Basel III]] agreement strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.<ref>{{Cite news |title=Explainer: What is the 'Basel III endgame' and why are banks worked up about it? |url=https://www.reuters.com/business/finance/what-is-basel-iii-endgame-why-are-banks-worked-up-about-it-2023-07-24/ |archive-url=http://web.archive.org/web/20240305143525/https://www.reuters.com/business/finance/what-is-basel-iii-endgame-why-are-banks-worked-up-about-it-2023-07-24/ |archive-date=2024-03-05 |access-date=2024-12-24 |work=Reuters |language=en-US}}</ref>
** [[Full-reserve banking]] is the hypothetical case where the reserve ratio is set to 100%, and funds deposited are not lent out by the bank as long as the depositor retains the legal right to withdraw the funds on demand. Under this approach, banks would be forced to match maturities of loans and deposits, thus greatly reducing the risk of bank runs.<ref>{{cite journal |author= Allen, W. R. |title= Irving Fisher and the 100 percent reserve proposal |journal= J Law Econ |year=1993 |volume=36 |issue=2 |pages=703–17 |doi=10.1086/467295|s2cid= 153974326 }}</ref><ref>{{cite conference |title= Does Argentina provide a case for narrow banking? |vauthors= Fernandez R, Schumacher L |pages=21–46 |year=1997 |book-title=Preventing Banking Sector Distress and Crises in Latin America |url=http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/02/24/000009265_3971031092501/Rendered/PDF/multi_page.pdf |veditors= Bery SK, Garcia VF |isbn= 0-8213-3893-5 |others= World Bank Discussion Paper No. 360 }}</ref>
** A less severe alternative to full-reserve banking is a [[reserve ratio]] requirement, which limits the proportion of deposits which a bank can lend out, making it less likely for a bank run to start, as more reserves will be available to satisfy the demands of depositors.<ref name=Heffernan>{{cite book |author= Heffernan, S. |chapter= The causes of bank failures |pages=366–402 |veditors=Mullineux AW, Murinde V |title= Handbook of international banking |year=2003 |publisher= Edward Elgar |isbn=978-1-84064-093-9}}</ref> This practice sets a limit on the fraction in [[fractional-reserve banking]].
* [[Transparency (market)|Transparency]] may help prevent crises from spreading through the banking system. In the context of the 2007-2010 [[subprime mortgage crisis]], the extreme complexity of certain types of assets made it difficult for market participants to assess which financial institutions would survive, which amplified the crisis by making most institutions very reluctant to lend to one another.<ref>{{Cite book |last=Butler |first=Cormac |url=https://www.google.com/books/edition/Accounting_for_Financial_Instruments/-qvciGKNf54C?hl=en&gbpv=1&bsq=Firstly,%20they%20could%20penalise%20complexity |title=Accounting for Financial Instruments |date=2009-02-18 |publisher=John Wiley & Sons |isbn=978-0-470-74375-1 |language=en}}</ref>
* [[Central banks]] act as a [[lender of last resort]]. To prevent a bank run, the central bank guarantees that it will make short-term loans to banks, to ensure that, if they remain economically viable, they will always have enough liquidity to honor their deposits.<ref name=Diamond2007/> [[Walter Bagehot]]'s book [[Lombard Street: A Description of the Money Market|''Lombard Street'']] provides an influential early analysis of the role of the [[lender of last resort]].<ref name=bag/>

The role of the lender of last resort, and the existence of deposit insurance, both create [[moral hazard]], since they reduce banks' incentive to avoid making risky loans. They are nonetheless standard practice, as the benefits of collective prevention are commonly believed to outweigh the costs of excessive risk-taking.<ref>{{cite journal |journal= J Finance |year=2007 |volume=62 |issue=5 |pages=2275–302 |title= Liquidity coinsurance, moral hazard, and financial contagion |author= Brusco, S. |author2=Castiglionesi, F. |doi=10.1111/j.1540-6261.2007.01275.x|citeseerx=10.1.1.410.8538 }}</ref>

Techniques to deal with a banking panic when prevention have failed:
* Declaring an emergency [[Emergency Banking Act|bank holiday]]
* Government or central bank announcements of increased lines of credit, loans, or bailouts for vulnerable banks