Panics, Bank Runs, and Coordination Problems
As we saw in the preceding chapter, banks provide a special combination of services. Acting as debtors (i.e., by accepting deposits), banks provide a means of payment that supports all commerce and that forms the major component of the money supply in a modern economy. Acting as creditors, banks provide an intermediation service between people with surplus savings and people in need of funds. However, this unique combination of functions also exposes banks to unique vulnerabilities. In this chapter we will examine first the structure of banks’ balance sheets and explain how this exposes them to the risk of destabilizing runs. Second, we will explain why a coordination problem among bank depositors ...
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