Internet Banking and the question of Bank Run - lesson from the case pf Northern Rock

Internet Banking - Journal of Internet Banking and Commerce An open access Internet journal(http/www.arraydev.com/commerce/jibc Journal of Internet

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Journal of Internet Banking and Commerce An open access Internet journal (http://www.arraydev.com/commerce/jibc/ ) Journal of Internet Banking and Commerce, December 2009, vol. 14, no.3 ( http://www.arraydev.com/commerce/jibc/ ) Internet Banking and the question of Bank Run: lesson from the Northern Rock Bank case Nathalie Janson, PhD Associate Professor, Rouen Business School, Normandy, France 1 rue du Maréchal Juin BP 215, 76825 Mont Saint Aignan Cedex, France Email: [email protected] Prof. Nathalie Janson is an Associate Professor of Economics and Finance at Rouen Business School. Her areas of interest are the economics of banking regulation and the Theory of Financial Intermediation Abstract The subprime crisis triggered a series of bankruptcies and bank runs at a level never experienced since the Great Depression. The banking environment radically changed since the 1930’s, in particular the development of information technology decreases considerably the cost of information. Furthermore internet banking increases severely the speed at which the demand for withdrawals are addressed to troubled banks. In the past demand for withdrawals could be slow down by fact that depositors had to physically « queue » and by the existence of opening hours of banks branches. Given these new circumstances a liquidity shortage may have an even more severe consequence on a bank since the delay between the « bad news » and the bank run can shorten dramatically. Indeed the Northern Rock Bank case in Great Britain illustrates that situation where a bank unable to borrow from its peers in the interbank market is within few hours ran by its depositors. The aim of the paper is to analyze the consequences of the major instability introduced by internet banking on the bank’s ability to manage a liquidity crisis and an opportunity to discuss further the so-called “endemic instability” of the fractional reserve banking system. Keywords: bank run – bank stability – government-sponsored insurance scheme – internet banking © Nathalie Janson, 2009
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JIBC December 2009, Vol. 14, No. 3 - 2 - INTRODUCTION The subprimes crisis triggered a series of bankruptcies and bank runs at a level never experienced since the Great Depression. The banking environment radically changed since the 1930’s, in particular the development of information technology decreases considerably the cost of information. As a result, not only information spreads must faster but information that were previously almost reserved to « informed » investors is now quickly made available to the public. This is not neutral on the probability of occurrence of a bank run despite the existence of government-sponsored insurance scheme and the implicit safety net existing for commercial banks in almost every developed country. As a matter of fact as soon as depositors find out about the fragile state of their bank, they can be tempted to transfer electronically their accounts to sound banks rather than queuing. Therefore the development of internet banking increases
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This note was uploaded on 04/21/2011 for the course BUSINESS AAF001-1 taught by Professor Dr.tony during the Spring '11 term at University of Bedfordshire.

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Internet Banking - Journal of Internet Banking and Commerce An open access Internet journal(http/www.arraydev.com/commerce/jibc Journal of Internet

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