At the centre of any bank's operations is a relationship which at any given time could become a major problem, but for the great majority of the time is not. A bank relies on the fact that although any and all of its' depositors have a right to withdraw that money at a given time, it is very unlikely that a great number of them will. Indeed it is expected that on average about as many people will choose to deposit some money with a bank on a given day as will want to withdraw some. Of course, as it is likely that these amounts will not match exactly, a bank holds a percentage of its assets in cash or at least liquid reserves in order to make up the difference if this is necessary.
             The remainder of a bank's assets are split between short-term loans such as credit cards and overdraft facilities, which are relatively liquid. Liquidity being the relative ease with which an asset can be turned into cash. Thus long-term loans, perhaps to buy a house (mortgage), a car or to start up a business, repaid over a much longer period of time, are therefore much less liquid. This imbalance creates the possibility of a crisis situation where if a certain number of depositors decided to withdraw their money at the same time, the bank would be unable to pay.
             A rush of withdrawals of this kind is known as a 'bank run'. From this point I will be examining the most likely and most observed causes of both the difficulties suffered by a bank initially, ways in which this can become a run on this bank and later a run on many banks as a result. Having done this I will later be looking at the primary methods of preventing such runs.
             Firstly I am going to look at a number of ways in which a bank may get into the kind of difficulties that may provoke depositors into making a run on their deposits.
             Credit risk is the possibility that borrowers will not be able to pay back their loans. There is always a risk of borrowers defaulting, but this risk may be in...