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Q89 (CDS-II/2016) Economy › Money, Banking & Inflation › Banking operations services Answer Verified

Which of the following with regard to the term T^ank run’ is correct?

Result
Your answer: —  ·  Correct: C
Explanation

A 'bank run' is a panic situation that occurs when a large number of depositors simultaneously attempt to withdraw their funds from a bank due to fears regarding the institution's solvency or ability to repay debts [2]. This phenomenon is rooted in the fractional reserve banking system, where banks maintain only a small portion of total deposits as liquid cash reserves, lending out the remainder to generate income [3]. Because the bank's reserves are insufficient to cover all deposits at once, a sudden surge in withdrawal demands can overwhelm its liquidity, potentially forcing the bank to sell assets at a loss or face default [2]. This loss of confidence often creates a self-fulfilling prophecy where the rush to withdraw funds actually triggers the bank's collapse. Modern bank runs can also be 'silent,' occurring through rapid electronic transfers rather than physical queues.

Sources

  1. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Management of Foreign Exchange Reserves > p. 69
  2. [1] Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > LOAN ACTIVITIES OF BANKS > p. 41
  3. [3] https://www.investopedia.com/terms/b/bankrun.asp
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