Bank stability

Why bank runs happen and how it all should be?

Banks mediate capital from their depositors to their debtors. The 2 sides of their balance sheet are - 1: their liabilities to their depositors, 2: their holdings [bonds, mortgage loans, ...]. Sometimes it happens that the balance sheet of a bank turns negative. Such situation may arise if the bank chooses its holdings badly or by a big macro-economical turn. For example: into the 2008 bank crisis the real estate mortgage loans went down, in 2023 the state bonds.

The reserves of the banks are usually enough to cover the deficit. But not always. If not than the bank can not pay back its depositors. At least not fully. But instead of decreasing the payments towards all depositors proportionally, the bank tries to fulfill its promise that is the fix interest, till it runs out of capital, at the end of which some depositors get only 0. This situation is a rational reason for a competition among the depositors to take out their capital quickly, to "run the bank".

Thus the instability of the banks roots in the interest being fixed. But that is not theoretically necessary, it is only a stupid habit. Banking can be reformed to get rid of the fixed interest. This requires only that banks take their capital not from their depositors but from their shareholders. They should not have depositors. As shareholders we (deposit | withdraw) capital (into | from) a bank by (buying | selling) the shares of the bank. A shareholder can withdraw only proportionally to his share in the bank. Hence earlier withdrawers do not run down the bank, hence no rational need to run the bank, ever. Thus this form of finance is stable.

But how should we buy and sell shares? This is what broker banks exist for. Broker banks hold deposits but they do not invest it [hence they do not carry investment risk] and they mediate to us the ability to trade on stock exchanges.

An other advantage of this form of finance is that diversification among multiple banks stocks and other type stocks is easy. Diversification greatly increase safety.