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

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  • Nathalie Janson

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

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    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.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00555630.

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    Date of creation: 01 Dec 2009
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    Publication status: Published, Journal of Internet Banking and Commerce, 2009, Vol. 14, n°3, pp.2-7
    Handle: RePEc:hal:journl:hal-00555630

    Note: View the original document on HAL open archive server: http://hal-rbs.archives-ouvertes.fr/hal-00555630
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    Related research

    Keywords: bank run; bank stability; government-sponsored insurance scheme; internet banking;

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    1. Rochet, Jean Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3233, C.E.P.R. Discussion Papers.
    2. Karl Shell & James Peck, 2004. "Bank Portfolio Restrictions and Equilibrium Bank Runs," 2004 Meeting Papers, Society for Economic Dynamics 359, Society for Economic Dynamics.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc.
    5. Skeie, David R., 2008. "Banking with nominal deposits and inside money," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 17(4), pages 562-584, October.
    6. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, American Finance Association, vol. 60(3), pages 1293-1327, 06.
    7. Samartin, Margarita, 2003. "Should bank runs be prevented?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(5), pages 977-1000, May.
    8. Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers, Cornell University, Center for Analytic Economics 01-10r, Cornell University, Center for Analytic Economics.
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