Well-meaning initiatives to end the era of US bailouts have also dried-up market liquidity. That could be almost as dangerous -

Banks perform critical functions in our economy, one of which is maturity transformation. They borrow in the short term, in the form of deposits, and invest in the long term, to a significant extent in the form of loans that are difficult for depositors to value. However, a loss in confidence in a bank can result in the withdrawal of deposits, creating a need for funds to be raised quickly by either borrowing replacement funds or liquidating assets. Since a loss in confidence generally makes additional borrowing unfeasible, the ability to liquidate assets is paramount.

Originally published in the International Financial Law Review on June 14, 2016.