Abstract and Keywords
This article reviews the theory and historical evidence related to the prevalence of bank failure, panics, and contagion. It argues that banking system panics are neither random events nor inherent to the function of banks or the structure of bank balance sheets, but are caused by temporary confusion about the incidence of shocks within the banking system. Drawing on empirical evidence, it contends that deposit insurance and other policies intended to prevent instability have become the single greatest source of banking instability.
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