Financial Crises: Explanations, Types, and Implications; by Stijn Claessens and M. Ayhan Kose; imf working Paper 13/28; January 1, 2013

D.   Banking Crises 

Banking crises are quite common, but perhaps the least understood type of crises. Banks are 

inherently fragile, making them subject to runs by depositors. Moreover, problems of 

individual banks can quickly spread to the whole banking system. While public safety nets – 

including deposit insurance – can limit this risk, public support comes with distortions that 

can actually increase the likelihood of a crisis. Institutional weaknesses can also elevate the 

risk of a crisis. For example, banks heavily depend on the information, legal and judicial 

environments to make prudent investment decisions and collect on their loans. With 

institutional weaknesses, risks can be higher. While banking crises have occurred over 

centuries and exhibited some common patterns, their timing remains empirically hard to pin 

down.