Question

To avoid insolvency, regulators decide to provide the bank with $25 million in bank capital. However, the bad news about the mortgages is featured in the local newspaper, causing a bank run. As a result, $30 million in deposits is withdrawn. Show the effects of the capital injection and the bank run on the balance sheet. Was the capital injection enough to stabilize the bank

Answer 1

1. With the bank run and capital injection, more cash was made available for the bank. There was increased demand on the bank to refund the deposits of customers.

2. The capital injection was not enough to stabilize the bank. At least additional $5 million was required to meet the demand of the customers.

Step-by-step explanation:

A bank run occurs when a greater number of a bank's customers demand the withdrawal of their deposits. This event causes a spiral reaction that eventually leads to more customers withdrawing their deposits, resulting in the bank's collapse if no outside capital injection is made within the shortest period of time.