Lessons we have learned from the crisis, by Jordi Galí
Have all financial crises been like this?
“Financial crises in the past happened much more often than they do now. In fact they were a regular occurrence and were strongly linked to banking panics. They were usually triggered because one or more banks in a particular country were seen as unsafe, and this would lead to a massive withdrawal of deposits by their customers.”
“In the 20th century, in the interwar period and particularly after the Crash of 1929 and the Great Depression that followed, the banking system was more strictly regulated. Up until that point it had essentially been unregulated. And most importantly, two new elements that tended to stabilize the system were introduced. One was the introduction of deposit insurance funds. [...] The other element was the emergence, or spread around the world, of central banks, which had a clear mandate to act as lenders of last resort, among other functions.”
“This has greatly reduced the incidence of bank panics. In fact, in the latest crisis there have been very few bank panics in the traditional sense of the term.”