Lessons from Three Financial Crises

In a recent column, Gillian Tett, Chair of the Editorial Board and US Editor-at-Large of the Financial Times, argues that the ongoing banking crisis bears a striking resemblance to the two other financial crises she has watched unfold in her career: Tokyo in the late 1990s and London in 2008. However, she notes one major difference between the recent crisis and those of the past: the access and availability of information.

Fractional banking, the foundation of modern finance, posits that banks must retain only a small proportion of the deposits they collect from customers as depositors rarely seek to withdraw all their money at once. This concept works well in normal conditions, recycling funds into growth-boosting loans and bonds. However, should anything cause depositors to lose trust in their bank's ability to return their money, fractional banking implodes. This has happened throughout history.