Economists agree: the age of the bank run – when millions of people withdraw their money from their bank accounts, throwing the financial system into jeopardy – has come to an end. However a different type of bank-run might dominate the 21^st century. Tyler Cowen writes:

• The shadow banking system which involves sophisticated financial products has become larger than the traditional commercial banking system.
• The money that individuals save in their bank accounts is insured by the government, leading to the end of commercial bank runs.
• However money in the shadow banking system is not insured and not risk free. Potential crises can become actual crises when investors pull their money out of the shadow banking system on short notice.
• Dealing with such shadow bank runs is complicated and has far-reaching consequences. The Eurozone is currently struggling with these issues.

To read more about the unappealing steps that countries can take to mitigate the effects of shadow bank runs, why this will lead to a “risky quest for yield”, and what the European Central Bank has been doing about it, click here.

Source: The New York Times

Via: Marginal Revolution