ACT 3030 Lecture Notes - Lecture 2: Federal Deposit Insurance Corporation, Bank Panic, Irving Fisher
Document Summary
A significant disruption in the flow of funds from lenders to borrowers. Typically leads to a recession as households and firms cut back their spending in the face of difficulty in borrowing money. Banks are relatively _______ because depositors can demand their money at any time, while banks may have difficulty selling the lans in which they have invested depositors" money. Banks face _____ _____ because they have difficulty meeting their depositors" demands to withdraw their money. Particular problem for banks if the government doesn"t provide insurance for deposits and if there is no central bank. The situation for a bank or another firm of having a negative net worth because the firm"s assets have less value than its liabilities. An insolvent bank may be unable to meet its obligations to pay off its investors. The process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close.
