The collapse of banks and the banking system disrupts both the payments system and the screening and monitoring of borrowers.

a. Intermediaries are insolvent when their liabilities exceed their assets.

b. Because banks guarantee their depositors cash on demand on a first-come, firstserved basis, they are subject to runs. Shadow banks like MMMFs and securities brokers also face runs because some of their liabilities can be withdrawn at face value without notice.

c. A bank run can occur simply because depositors have become worried about a bank’s soundness. Shadow banks also may face runs due to a loss of confidence.

d. The inability of depositors to tell a sound from an unsound bank can turn a single bank’s failure into a bank panic, causing even sound banks to fail through a process called contagion. Shadow banks face similar risks.

e. A financial crisis in which the entire system of banks and shadow banks ceases to function can be caused by:

i. False rumors.

ii. The actual deterioration of balance sheets for economic reasons.