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

  • Nathalie Janson

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

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    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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    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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    1. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc.
    2. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York.
    5. Karl Shell & James Peck, 2004. "Bank Portfolio Restrictions and Equilibrium Bank Runs," 2004 Meeting Papers 359, Society for Economic Dynamics.
    6. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
    7. Samartin, Margarita, 2003. "Should bank runs be prevented?," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 977-1000, May.
    8. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
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