Internet Banking and the question of Bank Run: lesson from the Northern Rock Bank case
AbstractThe 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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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
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bank run; bank stability; government-sponsored insurance scheme; internet banking;
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