mnandii wrote:It is sad people. Public confidence in banks is in tatters now just because of one headline. If you understand about fractional reserve then you will appreciate the grim situation. Basically in a bank run where people decide to withdraw their savings from banks the banking industry undergoes a crisis.
@mawinder is hinting that people are withdrawing from other institutions. It is important to remember that when you put your money in a bank, the bank does not safely tack it away in a safety deposit box! The bank actually gives your money out to others. What's more, with fractional reserve, the bank gives out more than it owns.
Therefore if depositors decide to withdraw, only the first few will be able to get money. At some point it becomes overwhelming for the bank and thus liquidity crisis hinted by @mainat.
It's sad folks if people decide to withdraw in droves.
This is just so you understand the beast called a bank. Not meant to scare you please!
@mnandii I also gave some hint on fractional reserve banking to @mawinder in the dubai bank saga(hope he is not in the crossfire this time around).
When it comes to bank stocks the first step before investing is always to compute the liquidity ratios(not to be confused with statutory capital ratios as dictated by cbk). Profitability here plays second fiddle.
With fractional reserve banking it does not matter whether a bank is solvent or not, once you have a bank run its curtains. Thats why loans to deposit ratio is both paramount in assessing a bank and at the same time a tad funny if you factor in the reserve holding percentage.
The main purpose of the stock market is to make fools of as many people as possible.