Finally, central banks still stand ready to intervene to prevent bank runs.

Otherwise, bank runs and debt panics will be rampant.

Those increased deposits at commercial banks were, by definition, an increase in the relevant stock of money.

Some banks may even prefer these flows to direct deposits.

At the same time, finance takes on quasi fiscal functions by excluding government fiscal deposits government deposits in the national treasury, commercial banks fiscal savings, and central treasury cash managed through commercial bank deposits from the money supply.

That means reaffirming the commitment to deposit insurance, closing unviable banks, and recapitalizing the rest with European (not Cypriot) funds.

Flooding banks with central bank money is no guarantee that deposits, which arise from spending or borrowing money, will increase in the same proportion.

And a lot of licit banks were also happy to accept deposits from very dubious sources without questions being asked.

On the international relations front, after 2010, as deposits from Europe left Cypriot banks, deposits from Russian businesses and individuals increased and Russia has many reasons to use money as a way of buying political control.

The interest rate on these totally safe and liquid deposits induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008.

Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). Normally, when a bank fails, the government engineers a financial restructuring if it has to put in money, it, of course, gains a stake in the future.

The Senate Agriculture Committee proposes blocking deposit taking banks from making markets in swaps.

After all, deposits from the small town banks were running off to big banks in money centers like New York, Chicago, and Los Angeles.

The American Bankers Association, worried about the fees that banks would be obliged to pay, vehemently opposed deposit insurance.

By quantity of money, experts normally mean M3, a broad measure that includes bank deposits. Flooding banks with central bank money is no guarantee that deposits, which arise from spending or borrowing money, will increase in the same proportion.

Slow money growth and dollarization of deposits have hampered the ability of commercial banks to finance the government, leaving more of the burden to the central bank.

It needs to provide an expanded form of deposit insurance during this time of turmoil, so that there are no more Northern Rock style bank runs.

Low interest rates on deposits encourage savers, especially households, to invest in fixed assets, rather than keep their money in banks.

Governments brought commercial banks under prudential regulation in exchange for public provision of deposit insurance and lender of last resort functions.

The Chinese authorities do it today, and they also set the minimum deposits banks must maintain with the central bank.

If such banks fail, they are resolved by the Federal Deposit Insurance Corporation (FDIC) in the normal fashion, and this has always been the market s ex ante expectation.

Because runs on banks can trigger widespread distress, governments explicitly guarantee insured deposits and implicitly guarantee all the other debts of mega banks.

Instead, the reform proposals have opted for a mixture of higher capital requirements for leading banks and pre funding of deposit insurance by a special levy on banks.

Similarly, banks have short term liabilities (deposits) and long term assets, which they cannot liquidate quickly without incurring great losses.

Absolutely not. The provision of liquidity, the recapitalization of banks, more uniform deposit insurance across the advanced countries these were all correct and necessary measures.

But now commercial banks are willing to hold their excess reserves at the Fed, because the Fed now pays interest on those deposits.

The irony is that Congress took up the big banks offer to separate commercial and investment banking, but then enacted deposit insurance anyway.

Banks grew out of a practice by gold smiths and silver smiths, who, for a small price, accepted deposits for safekeeping.

Bank runs started almost immediately and quickly engulfed the country, resulting in the Bank Holiday of 1933 that is, in the forced closure of the entire US banking system.

As a consequence, chaos looms in Greece, as does the prospect of subsequent bank runs in Spain, Italy, and France and thus a financial avalanche that would bury Europe. And then?

When banks make loans, they create deposits for borrowers, who draw on these funds to make purchases. That generally transfers the deposits from the lending bank to another bank.

With the gradual dismantling of Glass Steagall, and its final repeal in 1999, bankers triumphed over both the busters and the regulators, while maintaining deposit insurance for the commercial banks.

Moreover, they must maintain an extensive and thus expensive domestic retail network to collect the savings deposits from which they are not profiting.

While the central bank should stand ready to intervene to prevent bank runs, it should let the financial sector run itself with a light regulatory hand, viewing itself not as a chaperone but rather as the designated driver in the case of speculative excess.

Avoiding a post exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits.

This is particularly true of the repo markets, which provide the equivalent services for professional investors banks and large corporations that ordinary bank deposits provide for individuals and small firms.

With more deposits at their disposure and a more flexible interest rate policy, banks would be able to price risks more easily and thus lend more to SMEs.

Banks would then find it advantageous to hold their surplus liquidity in the form of T bills as long as these bills yielded more than bank deposits held at the ECB.

In the last month alone, Australia, India, Mexico, and others have cut interest rates. China has reduced reserve requirements on banks.

So, if the PBOC sets the interest rate on one year deposits at 3 , commercial banks can offer depositors a rate as high as 3.3 .

But they have not eschewed the use of variable capital and reserve requirements, loan to deposit ratios, and thresholds for minimum deposits and maximum leverage as controls on property lending.

Europe wants to preserve its universal banking model, with banks that serve a broad range of functions, ranging from taking deposits to making small commercial loans to high level investment banking activities.

The eurozone needs a banking union a European deposit insurance scheme in order to stem capital flight, a European source for financing bank recapitalization, and eurozone wide supervision and regulation.

A bank with thin margins and limited liability does not have much to lose, and will tend to gamble a tendency that is exacerbated by deposit insurance and too big to fail policies.

Nor can it be used to establish a European deposit protection scheme, which is arguably the most urgent requirement, to stem the outflow of deposits from southern European banks.