Bank panics often arise from a lack of confidence in a bank’s ability to meet its obligations. One common cause is:
- A potential buyer of the assets of a bank incorrectly rumored to be distressed may suspect the assets to be of poor quality.
When rumors spread that a bank is in trouble, it can trigger a loss of confidence among depositors and investors. If individuals think that the bank might fail, they might rush to withdraw their funds, leading to a liquidity crisis. This panic can create a vicious cycle where the more people withdraw, the more the bank’s financial health deteriorates, potentially leading to actual insolvency.
Hence, the fear of a bank’s asset quality being poor—driven by rumors—can indeed catalyze a bank panic, as stakeholders react to perceived threats rather than actual financial data.