A situation that a bank or financial institution faces when its liquidity drops down due to an irregular increase in concurrent withdrawals by customers/ accountholders. This would be the case when individual customers rush to withdraw their money at the same time or within a very short period of time, out of fear that a bank would not have enough funds to meet their requests for money. This wave of collective withdrawal causes a liquidity run on the bank. However, the so-called bank run is usually trigger by many factors, not limited to liquidity runs (including prepayment of loans, unwillingness to transact through the banking system, etc.)
In practice, there is a host of measures that banks can take to weather such a situation of liquidity run, including:
- stopping lending in the interbank and repo markets and sell government securities (even at fire sale prices).
- selling liquid securities and adjusting their loan portfolios.
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