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You're right that the bank cannot unilaterally prevent a payout. Practically speaking though, what usually happens during a potential bank run is that governme

You're right that the bank cannot unilaterally prevent a payout. Practically speaking though, what usually happens during a potential bank run is that governments declare a bank holiday, preventing customers from withdrawing funds. That buys the government (and the bank) time to get their ducks in a row, line up bailouts, etc. Things get a LOT worse if the bank is actually allowed to go under. Letting Bear Stearns and Lehman collapse was, in retrospect, probably a mistake that made the eventual bailout need to be larger.

zAy0LfpBZLC8mAC 9y ago
Well, that really depends on the bank, though. In the case of smaller/local banks, chances are that it will simply go bankrupt to be wound down and deposit insurance will pay out the balance (or as much of it as is insured) within a couple days. But also, bankruptcy does not necessarily imply that the bank collapses: One way to resolve a bankruptcy is to obtain funds, possibly in the form of a bailout, that allow any demands to be fulfilled. Rather, bankruptcy is exactly the thing that allows the bank to refuse payouts even when it's not a bank holiday. The point is that once a bank has declared bankruptcy, it is not allowed to pay out to anyone anymore without oversight, because the bankruptcy proceedings are supposed to make sure that everyone that the bank is indebted to gets a fair share of the remaining assets--or possibly to find a solution that allows the bank to resume operations by accepting a later payout for some of its debts. The important point in all of this is that in any case, none of this can be used directly to increase the equity of the existing owners. If the bank has to obtain loans in order to fulfill its obligations, the interest on that is paid from equity. If there is no equity, the bank changes ownership (like, if the state bails out the bank, the state gets to own the bank). So, even if the bank might refuse to pay out under certain circumstances, the processes that get triggered by that have as their primary goal to make those payouts happen as soon as possible, not to allow the bank's owners to keep anything.

zAy0LfpBZLC8mAC 9y ago

Well, that really depends on the bank, though. In the case of smaller/local banks, chances are that it will simply go bankrupt to be wound down and deposit insurance will pay out the balance (or as much of it as is insured) within a couple days. But also, bankruptcy does not necessarily imply that the bank collapses: One way to resolve a bankruptcy is to obtain funds, possibly in the form of a bailout, that allow any demands to be fulfilled. Rather, bankruptcy is exactly the thing that allows the bank to refuse payouts even when it's not a bank holiday. The point is that once a bank has declared bankruptcy, it is not allowed to pay out to anyone anymore without oversight, because the bankruptcy proceedings are supposed to make sure that everyone that the bank is indebted to gets a fair share of the remaining assets--or possibly to find a solution that allows the bank to resume operations by accepting a later payout for some of its debts. The important point in all of this is that in any case, none of this can be used directly to increase the equity of the existing owners. If the bank has to obtain loans in order to fulfill its obligations, the interest on that is paid from equity. If there is no equity, the bank changes ownership (like, if the state bails out the bank, the state gets to own the bank). So, even if the bank might refuse to pay out under certain circumstances, the processes that get triggered by that have as their primary goal to make those payouts happen as soon as possible, not to allow the bank's owners to keep anything.