banking panic

A banking panic is a severe financial disturbance characterized by widespread bank failures, stock market crashes, or a general climate of fear due to economic crisis. These events are distinct from the entire period of a business cycle decline.1

Historically, panics were often linked to shortages and speculation, such as the South Sea Bubble in 1720. In more complex, industrialized economies, panics reflect instability in advanced economies and can precede crises affecting consumption and industry. For instance, the Panic of 1857 in the United States involved railroad bond defaults and tied-up bank assets, leading to bank failures and unemployment.1

Central banks play a crucial role in preventing banking crises by supplying cash reserves to banks at risk of failure and acting as a lender of last resort. Deposit insurance is also a key measure, protecting depositors and preventing costly bank runs and panics that could collapse the banking system. The Great Depression in the United States was exacerbated by multiple waves of banking panics, which led to a significant contraction of the money supply and further economic decline.234