CB_Week 4 - Commercial Banking Lecture Notes 4 Razvan Vlahu...

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Commercial Banking Lecture Notes 4 Razvan Vlahu
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Agenda Liquidity provision and bank runs – Simple framework based on Diamond/Dybvig (1983) Institutional remedies against bank runs – Deposit insurance
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Some questions You have a deposit with ING. It’s 4PM and the bank closes its door at 5PM. Your colleague who has done an internship at ING tells you that he heard some rumours about big problems at the bank. What should you do? Let’s say you did nothing. Now is 7PM and the CEO of ING is on TV making a statement about the financial health of his bank. He says the bank is liquid and solvent. However, during the evening you talk with some friends/relatives and they also “heard” about ING’s problems. At 9PM an official from DNB makes a statement about how solid ING is. What should you do in the morning?
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Questions (cont’d) Let’s say you did nothing. As you are sitting very concerned in your office you hear at the radio that people are queueing at many ING offices to withdraw their money (and that many have done this already via Internet banking).What should you do? Let’s say you rush to the bank. There, while waiting in line, an official from DNB is on radio/TV saying that the deposit insurance limit was doubled. Your deposit is far below the new amount. What should you do now?
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Questions (cont’d) Let’s say you went back to work. Late in the evening, you watch CNBC and find out that UBS and CS withdraw a huge amount they have in interbank deposits with ING. What should you do in the morning? Let’s say you finally decided to take out your money. And let’s say you were successful. Now, you are relaxed and make jokes about this situation. Meanwhile, your colleague who has money with ABN is worried . There is any reason for that?
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History does not repeat itself…
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…but it does rhyme….
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Northern Rock, Sept 2007: before and after… ... the government’s promise to guarantee customers’ savings:
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Nepal Bangladesh Bank, Nov 2006 on November 8, 2006, Nepalese newspapers reported that Nepal Bangladesh (NB) Bank’s solvency may be at risk due to misuse of deposits by the bank’s management in principle, the central bank would step in and take over the bank however, NB Bank’s management was able to convince a local judge to prohibit the central bank from intervening depositors heard about the court decision and, fearing for their investments, starting queuing up to withdraw their savings over the following three days, depositors withdrew about 3 billion Nepalese rupees (25 percent of deposits) on November 12, 2006, the central bank eventually took over the bank’s management, which stopped the withdrawals
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Fortis Bank, Sept 2008 The Belgian-Dutch financial group was one of the largest business in the world by revenues at the onset of financial crisis of 2007 Fortis (& RBS & Santander) won a hostile bidding war against top management of ABN AMRO in Oct 2007 Deal was 70 billion Euros, 24.2 billion in equity Large withdrawals of individuals, business & institutional clients; collapse of interbank lending Failed attempts to calm down the markets
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The Nederlands, Run on DSB bank, Oct 13 2009
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