In academic research published before he entered government, Fed Chairman Ben Bernanke wrote:
[In] a system without deposit insurance, depositor runs and withdrawals deprive banks of funds for lending; to the extent that bank lending is specialized or information sensitive, these loans are not easily replaced by nonbank forms of credit.
a. What does it mean to say that bank lending is “information sensitive”?
b. What are “nonbank forms of credit”? Why would bank lending being “information sensitive” make it difficult to replace with nonbank forms of credit?
c. Does Bernanke’s observation help explain the role bank panics played in the severity of the Great Depression?