Fed Gov Explains How to Avoid a Run on the Banks
Federal Reserve Governor Jeremy Stein recently spoke to economists at an American Economic Association (AEA) conference on the subject of the “shadow banking sector” (SBS) that has created to temperament for a run on the banks.
Stein said this SBS was integral to the crash in 2007 that has cost the US a stable economy.
The central banker said: “Shadow banking money is much more run prone than bank money.”
Stein explained: “A stable deposit franchise gives a bank the ability to ride out transitory valuation changes of the sort that might come from noise-trader shocks or fire sales, without being forced to liquidate assets at temporarily depressed prices.”
Indeed Stein asserted that “banks have government insurance for the deposits they hold and are relatively well capitalized compared to other financial institutions thanks to the regulation that comes along with that insurance. It’s other financial institutions, generally called shadow banks, that are much more prone to runs.”
Government handouts, deposit insurance and a reliance on digital transactions have developed the pathway we are on now.
