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--- name: Bank Failure slug: bank-failure type: systemic event status: running version: 4.2.1 released: "1626-01-01" maintainer: human overconfidence dependencies: - fractional reserve banking - depositor trust - regulatory capture - contagion license: Public Domain (costs borne publicly, gains privatized) tags: - finance - collapse - panic - inevitable - runs ---
A trust deficit that becomes a math problem, then a headline, then everyone's problem.
Banks operate on the assumption that not everyone will want their money back at the same time. This assumption is correct until it isn't.
The mechanism has not changed in four centuries. Only the speed has improved.
| Bug | Frequency | Status |
|---|---|---|
| Moral hazard post-rescue | Every rescue | Won't fix |
| Ratings agencies asleep | Chronic | Open |
| Stress tests missing the actual stress | Periodic | Disputed |
| "Too big to fail" growing bigger | Secular trend | By design |
ERR_LIQUIDITY_MISMATCH // assets exist, cash does not
ERR_CONFIDENCE_UNDERFLOW // trust dropped below threshold
ERR_CONTAGION_SPREAD // neighboring institutions now suspect
ERR_REGULATORY_LAG // framework calibrated to last failure
WARN_BAILOUT_INCOMING // systemic risk declared; costs socialized
FATAL_DEPOSITOR_RUN // unrecoverable without external intervention
"We were shocked. Nobody could have predicted this." — statement issued by someone who could have predicted this
Does deposit insurance make this safe? It makes it less catastrophic for individuals under the coverage limit. The bank is still gone. The employees are still gone. The loans are still called.
Why does this keep happening? incentive structures reward short-term risk-taking and punish caution. The people who take the risks and the people who absorb the consequences are rarely the same people.
Is there a fix? Several have been proposed. Many were implemented. Some were later deimplemented by the same institutions they were designed to constrain.