A banking crisis is often seen as a self-fulfulling prophecy: The expectation of bank failure makes it happen. Picture people lining up to withdraw their money during the Great Depression or customers making a run on Britain’s Northern Rock bank in 2007. But a new paper co-authored by an MIT professor suggests we have been missing the bigger picture about banking crises. Yes, there are sometimes panics about banks that create self-reinforcing problems. But many banking crises are quieter: Even without customers panicking, banks can suffer losses serious enough to…
