Why Banks Panic

Abstract

As we have seen, there is no single cause of a bank panic; instead there are several factors which set the stage for bank depositors to panic about a bank and withdraw savings en masse, starting a bank panic. In general, what are the principal reasons for bank panics? We can now compare the set of historical cases, which we have been studying: US bank panics of 1857, 1907, 1930–1933, and 2007–2008 and Greek Cyprus bank panic of 2013. In this comparison we will see at least five main ways in which banks set themselves up for a potential panic: (1) funding excessive leverage in speculation, (2) lack of proper banking regulation, (3) bad banking practices, (4) lack of banking integrity, and (5) corrupt banking.