Bank Runs (plus Jonathan Clements on "My Money Journey") (EP.247)
The Rational Reminder Podcast
The Benefits of Cryptocurrencies
Banks have a function that you can't just replace with something like crypto. They're transforming long-term in illiquid assets into short-term and liquid-bought liabilities. SBB had to pay 4% or whatever on deposits, while they were still getting very low yields on their fixed income portfolio. The bank is the intermediary for the loan. It's able to spread the risk of needing liquidity across lots of different depositors who need to consume their assets at different times.
There’s been a lot of interest in the topic of bank runs lately, and in today’s episode, we take a look at the most relevant research to help us better understand why they happen and how they can be avoided. Our conversation unpacks the 2022 Nobel prize-winning work of Douglas Diamond and Philip Dybvig and examines the three primary risks that banks need to navigate to avoid a bank run related crisis. We discuss the immense value that banks provide and how they keep the economy moving, before reflecting on how their most valuable services are inexorably tied to the risk of bank runs. You’ll also learn about the role of the media in triggering a bank run, and how the problems that arise with bank runs can be addressed through a combination of deposit insurance, bank regulation, and a diverse customer base — all of which are designed to keep depositors from panicking simultaneously. We also revisit a past conversation with Jonathan Clements, before catching up with him in real time to discuss his new book My Money Journey: How 30 People Found Financial Freedom - and You Can Too. Tune in for an in-depth look at bank runs, the value of writing your money story, and a timely reminder that when you’re making a deposit, you’re actually lending money to the bank.
Key Points From This Episode:
• An introduction to the topic of bank runs including an overview of the Nobel prize-winning work done on the subject in 2022. (0:02:12)
• The three primary risks you need to manage as a bank in order to be a successful business. (0:07:28)
• Why liquidity, illiquidity, and duration risk can pose a problem, even for healthy banks. (0:12:47)
• How news stories can create unwarranted panic and cause a bank run, even if a bank isn’t experiencing problems. (0:16:02)
• The multiple equilibria of banks as outlined in the Diamond and Dybvig paper. (0:16:31)
• How deposit insurance can function as a solution, at least in part, to bank runs. (0:19:34)
• What the Diamond and Dybvig paper teaches us about the Silicon Valley Bank (SVB) bank run. (0:21:35)
• The difference between households and banks, and the lessons households can learn from the narrative around bank runs. (0:22:59)
• A quick recap of our conversation with Jonathan Clements and a review of his new book My Money Journey: How 30 People Found Financial Freedom - and You Can Too. (0:27:16)
• We welcome Jonathan Clements back onto the show to discuss his new book and why he wrote it. (0:32:00)
• What readers can expect to learn from Jonathan’s book, like the impact parents have on your financial beliefs, and what inspires people to reassess their finances. (0:34:31)
• The impact of early habits on our finances. (0:38:36)
• Jonathan’s insights into the financial service industry, its complexity, and how our risk tolerance can shift over time. (0:40:19)
• Why regret in financial decision-making is virtually unavoidable and the value of writing your money story. (0:44:22)
• Past and upcoming meetups, feedback from our listeners, and a reminder of our 23 in 23 Reading Challenge. (0:47:42)
Participate in our Community Discussion about this Episode:
Book From Today’s Episode:
My Money Journey: How 30 people found financial freedom - and you can too — https://amzn.to/439D5Hw
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Shop Merch — https://shop.rationalreminder.ca/
Join the Community — https://community.rationalreminder.ca/
Follow us on Twitter — https://twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — https://twitter.com/benjaminwfelix
Cameron on Twitter — https://twitter.com/CameronPassmore
Jonathan Clements on Twitter — https://twitter.com/clementsmoney
Jonathan Clements on LinkedIn —https://www.linkedin.com/in/jonathanclements
Jonathan Clements on Facebook — https://www.facebook.com/ClementsMoney
Jonathan Clements — http://HumbleDollar.com
Episode 55: Jonathan Clements — https://rationalreminder.ca/podcast/55
'Bank Runs, Deposit Insurance, and Liquidity' — https://www.journals.uchicago.edu/doi/10.1086/261155
'Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking' — https://www.jstor.org/stable/10.1086/319552
'Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or . . .)' — https://www.jstor.org/stable/43910017
'Long-Horizon Losses in Stocks, Bonds, and Bills: Evidence from a Broad Sample of Developed Markets' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3964908
The AI-powered Podcast Player
