This would weaken the efficacy of monetary policy. As a result, people may sell the currency concerned, and/or revert to gold or private cryptocurrencies. Thirdly, there is the reputation effect: bank failures result in loss of faith in the financial system. Quickly another bank can fail, and another one etc. That leads me to the second point: Banks are network businesses and we experience the problem of ‘contagion’ quickly: As one bank fails, this will have ripple-on effects on other banks. (Also, this means we should continue to create new banks, since more banks generally result in higher economic growth). Of course, the impact is larger, the more banks go bust. If the banks collapse, the money supply shrinks, and thus economic growth declines, unemployment rises and we experience a recession. For economic growth to take place, this money supply needs to grow, which means banks need to extend loans for transactions that contribute to GDP. Most of the money we use is actually Bank Digital Currency (BDC), which accounts for ca. Let’s not forget that banks create credit and this is how our money supply is created and expanded. This had a devastating impact on the economy.

10,000 small banks that it let fail or even drove into failure.

We saw this in the 1930s, when the US Federal Reserve oversaw the bankruptcy of ca. To consider the question whether banks should be allowed to fail, we have to be aware that bank failures have a significant adverse impact on society.įirstly, there is the impact on the economy, on economic growth and employment. A brief response to a common question after the takeover of Silicon Valley Bank and Signature Bank by the regulators.

Bank it or bust idea