The following editorial is a look at what fractional-reserve banking is and why the practice can lead to economic instability.
Electronic Banking and the Speed of Information Can Fuel the Threat of Financial Contagion
In the movie “It’s a Wonderful Life,” the news of insolvency spread through the town like wildfire, but bank run news these days could be a whole lot faster due to several factors related to advances in technology and the speed of information. First, the internet made it easier for information to spread quickly, and news of a bank’s financial instability can be disseminated rapidly through social media, news websites, and other online platforms.
Lastly, and maybe the most important part of today’s differences, is the interconnectedness of the global financial system means that a bank run in one country can quickly spread to other regions. The speed of information, electronic banking, and the connected financial system could very well lead to a much faster and more widespread contagion effect than was possible in the past.
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