Bank deposits and credit as sources of systemic risk

There is little agreement on even the rudimentary definitions of a financial crisis, the sequence of events constituting a crisis, or the causes of these events. This article investigates the various theories of financial panics and crises with particular emphasis on the links between credit and deposits. ; The survey suggests that panics are not perfectly predictable, as some theories may suggest, but neither are they random events. Information asymmetries about banks ability to liquefy deposits were apparently a major contributing factor to banking panics in the past. In addition, financial crises do not seem to have been primary causal agents of recessions. The analysis also suggests that government policies can affect the likelihood of a financial crisis as well as play a role in its solution. The article raises a cautionary note that the dynamics of crises may differ significantly going forward given recent, rapidly developing changes in the U.S. and world financial system.