Banks are designed to fail — and they do

Banks fail. When they do, those who stand to lose scream for a state rescue. If the threatened costs are big enough, they will succeed. This is how, crisis by crisis, we have created a banking sector that is in theory private, but in practice a ward of the state. The latter in turn attempts to curb the desire of shareholders and management to exploit the safety nets they enjoy. The result is a system that is essential to the functioning of the market economy but does not operate in accordance with its rules. This is a mess. Money is the stuff one must have if one is to buy the things one needs. This is true for households and businesses, which need to pay suppliers and workers.

That is why bank failures are calamities. But banks are not designed to be secure. While their deposit liabilities are supposed to be perfectly safe and liquid, their assets are subject to maturity, credit, interest rate and liquidity risks. They are fair weather institutions. In bad times, they fail, as depositors run for the door.

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