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The simplest fix for banking

By Jan Eeckhout

23 Mar 2023 · 4 min read

Editor's Note

An economics professor argues why using central bank digital currencies (CBDC) could lead to an end of bank runs and what's stopping major economies from adopting them.

BARCELONA – Last year, the Nobel Prize in Economics went to two economists who study the dynamics of bank runs, as well as to former US Federal Reserve Chair Ben Bernanke for his work analyzing how central banks have dealt with some of history’s worst banking crises, such as those in the Great Depression of the 1930s. Half a year later, we are witnessing another bank run whose contagious effects could destabilize economies, trigger recessions, and impose high costs on taxpayers.

Banks play a double role in the economy, taking short-term deposits and savings and then using those savings to lend money over the long term in the form of mortgages, business loans, and other investments. A run occurs when enough depositors come to fear that a bank may go bust, taking their savings with it. They all run to the bank to withdraw their funds, but because the bank has deployed those funds toward the other services it provides, it becomes insolvent. Having witnessed such runs, US President Franklin Roosevelt’s administration (followed by others around the world) created insurance schemes to alleviate depositors’ fears that they would not get at least some of their money back following a run.

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