Banks are designed to fail. And so they do. Governments want them to be both safe places for the public to keep their money and profit-seeking takers of risk. They are at one and the same time regulated utilities and risk-taking enterprises. The incentives for management incline them towards risk-taking, just as the incentives for states incline them towards saving the utility when risk-taking blows it up. The result is costly instability.
If one thing is clear about the events of the last two weeks, it is that the vaunted reforms introduced after the global financial crisis have not changed any of this that much, or at least not enough.
Yes, leverage of banking systems has fallen since the crisis. But it remains dangerously high. According to the Federal Reserve, on March 8 2023, the difference between the book value of the assets and debt liabilities of US commercial banks was $2,137bn. This slice of equity backed assets that were notionally worth $22,800bn. But a recent paper suggests that mark-to-market losses are already around $2tn. A general run would force these losses into the open and wipe out the equity. To prevent this, the authorities may have to protect all deposits.