Chapter 20. Bank Runs
“With this one piece of legislation, the fear which operated so efficiently to transmit weakness was dissolved. As a result the grievous defect of the old system, by which failure begot failure, was cured.”1
J.K. Galbraith, on deposit insurance
Market financing of banks makes them vulnerable to “bank runs”—when depositors lose confidence in them and pull out their funds. The run on the UK’s Northern Rock showed that bank runs could still happen. The runs on Wall Street’s “shadow banks” and then on Bear Stearns were more deadly because they had investments throughout the global financial system—a run on a single bank could burst bubbles across the world.
On the night of September 13, 2007, Robert Peston, the BBC’s business ...
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