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Handbook of the Economics of Finance by Rene M. Stulz, M. Harris, George M. Constantinides

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4 Banking panics and the stability of banking systems

A key question about financial intermediaries is whether they are inherently unstable, that is, prone to banking panics? Some researchers believe that a theoretical model of the existence of financial intermediaries must simultaneously be a model of panics; banks and panics are inherently intertwined and models should reflect this. Whether this is the correct view or not clearly is at the root of public policies towards banks. In this section we first review the historical evidence on the experience of banking systems with respect to panics. This experience is quite heterogeneous, even though all these systems have banks offering the same asset and liability contracts. We also review the international ...

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