Their breakdown induces a marked weakening in economic growth. A wider range of nonbank institutions, including viable debt and equity markets, can provide important safeguards of economic activity when the banking system fails.
Fifth, despite its importance for distributing savings to their most valued investment use, excessive short-term interbank funding, especially cross border, may turn out to be the Achilles’ heel of an international financial system that is subject to wide variations in financial confidence. This phenomenon, which is all too common in our domestic experience, may be particularly dangerous in an international setting.