Banking is an important part of any modern economy, as it is essential for
stimulating economic growth, channelizing financial flows, assisting the
payment system, and implementing monetary policy effectively. Banks are
the most important financial intermediaries in the financial system of an
economy, and are as important to the economy as heart is to a human
body. Banks mobilise savings by accepting deposits from the people,
create credit by lending money to their customers and to other banks,
provide loans to businessmen, purchase government securities, and
provide merchant banking services to businessmen. Banks also provide
customers with safe deposit vaults and provide security to their valued
possessions. Banks have become a 'one stop shop' and provide customers
with various investment opportunities under the same roof, viz.capital
markets, government securities, insurance, etc. In view of Friedman and
Schwartz (1963), banking panics caused contractions in the money supply
which caused slowdown in economic activities and eventually results in a
financial crisis. In another school of thought, banking panics are not a
financial crisis but a pseudo-financial crisis
