Consider two banks: Bank A and Bank B. Bank A has total assets worth $50,000 and total liabilities worth $24,000. Conversely, Bank B has total assets worth $100,000 and total liabilities worth $90,000

Question

Given this information, which of the two banks is more prone to bank runs and why?

Answer 1

A bank run occurs when a bank experiences extraordinarily large volumes of withdrawals driven by a concern that the bank will run out of liquid assets with which to pay its depositors. This implies that bank runs are more likely to occur when depositors do not have much confidence on the solvency of a bank. Hence, one of the key methods to prevent such bank runs is to have lots of stockholders' equity and be well-capitalized. A bank is said to be well-capitalized if it owns far more than what it owes.
From the given information, the stockholders' equity for both banks can be calculated.
Bank A's stockholders' equity = $50,000 - $24,000 = $26,000.
Bank B's stockholders' equity = $100,000 - $90,000 = $10,000.
The stockholders' equity implies that bank A owns more than it owes, while bank B owes more than it owns. Hence, bank B is more prone to bank runs than bank A.