Just over 10 years ago, the UK experienced, with Northern Rock, its first visible bank run in one-and-a-half centuries. That turned out to be a small event in a huge crisis. The simplest question this anniversary raises is whether we now have a safe financial system. Alas, the answer is no. Banking remains less safe than it could reasonably be. That is a deliberate decision.
Banks create money as a byproduct of their lending activities. The latter are inherently risky. That is the purpose of lending. But banks’ liabilities are mostly money. The most important purpose of money is to serve as a safe source of purchasing power in an uncertain world. Unimpeachable liquidity is money’s point. Yet bank money is least reliable when finance becomes most fragile. Banks cannot deliver what the public wants from money when the public most wants them to do so.
This system is designed to fail. To deal with this difficulty, a source of so much instability over the centuries, governments have provided ever-increasing quantities of insurance and offsetting regulation. The insurance encourages banks to take ever-larger risks. Regulators find it very hard to keep up, since bankers outweigh them in motivation, resources and influence.