The banking system is built on trust. Central to this idea is the public perception of banking as a safe industry, and the positioning of banks as highly stable institutions, bolted into the very heart of society. It would be a surprise for many people to learn that banks fail far more frequently than they might expect.
The banking business model is inherently extremely risky owing to the issue of liquidity - banks lend long and borrow short, and in doing so, extend credit to society. Over centuries, this has been critical for driving innovation and business ventures, allowing economies to grow and prosper.
Because banks are highly leveraged, however, they run the risk of a liquidity crisis, brought on by deposits and other sources of funding being suddenly, collectively, withdrawn. To manage this risk, since the introduction of the Basel accords in the 1970s, banking regulations have increasingly focused on building up capital buffers, developing ever-more complicated mathematical models that attempt to ascertain the perfect level of capital that banks should hold to be "safe".
The great irony of modern banking is that the primary concept by which risk is formally measured completely disregards the real reason that banks fail. Banks rarely, if ever, fail because they deplete their capital buffers.
The real reason banks fail is a loss of trust. This book explores the question of why banks fail, taking an integrated approach that considers both the technical and social factors that lead to bank failure, and contemplates what practical steps may be taken to restore trust in banks, in the financial system as a whole, and in the very idea of capitalism itself.
