Skip to Content
77 Mass Ave

Quiet banking panics

Many kinds of finance-sector failures—not just bank runs—can depress the economy.

April 27, 2021
banking
Pexels

A banking crisis is often seen as a self-­fulfilling prophecy: banks fail because too many people, anticipating failure, pull their money out at the same time. But a newly published paper coauthored by finance professor Emil Verner suggests that banks can suffer losses serious enough to cause economic downturns even when that dramatic panic never happens.

The researchers examined bank stock prices and dividends, gross domestic product, inflation, and other data from 46 countries between 1870 and 2016. They found that a 30% decline in banking-sector equity predicts a 4.6% drop in real GDP after three years when creditors visibly panicand a 2.7% drop when they don’t.

These quiet panics tend to happen when banks have lost assets through decisions such as bad loans. In those cases, Verner says, banks reduce lending, leaving businesses and households with less access to the credit that fuels economic growth. 

“The panics don’t just come out of the blue. They tend to be preceded by bank stocks declining,” he says. “The bank equity investors recognize the bank is going to suffer losses on the loans it has. And so what that suggests is that panics are really often the consequences, rather than the fundamental cause, of troubles that have already built up in the banking system due to bad loans.”

The researchers have presented their findings to policymakers in hopes that it will help them respond to future crises. 

Keep Reading

Most Popular

This startup wants to copy you into an embryo for organ harvesting

With plans to create realistic synthetic embryos, grown in jars, Renewal Bio is on a journey to the horizon of science and ethics.

VR is as good as psychedelics at helping people reach transcendence

On key metrics, a VR experience elicited a response indistinguishable from subjects who took medium doses of LSD or magic mushrooms.

This nanoparticle could be the key to a universal covid vaccine

Ending the covid pandemic might well require a vaccine that protects against any new strains. Researchers may have found a strategy that will work.

Stay connected

Illustration by Rose Wong

Get the latest updates from
MIT Technology Review

Discover special offers, top stories, upcoming events, and more.

Thank you for submitting your email!

Explore more newsletters

It looks like something went wrong.

We’re having trouble saving your preferences. Try refreshing this page and updating them one more time. If you continue to get this message, reach out to us at customer-service@technologyreview.com with a list of newsletters you’d like to receive.