[JanisL]

In the modern world we primarily have banking systems that are based on fractional reserve banking and currencies without any explicit backing. This means that from a forex point of view the currencies are only worth as much as there is confidence in them. (National currencies often derive power in a practical sense due to taxes having to be paid in those currencies even without any explicit backing of the currencies value). Because of these dynamics if everyone were to try to withdraw their money from the bank at the same time there would be a major problem because the banks don't have the money to cover it. An event that makes people in a country all want to withdraw their money will cause a crisis just about everywhere at the moment. Sure you'll get people from the central bank saying they can create enough money to pay everyone out, which they can pretty easily do due to the fact that most money now is just entries in a database. But the problem in all modern banking crisis situations isn't so much the act of giving people money its what you can buy with that money. (A caveat, when things get really bad like they did in Venezuela the currency degraded so much that the government had problems paying for the printing and transport of new banknotes with even more zeros, but that's a rather exceptional case that occurred very late in a crisis, again the money was buying less)

Banking crisis conditions can come about for a variety of different reasons but they all involve some lack of confidence in the ability to be able to exchange money for goods at a later point in time. This can come about because people aren't able to access their money in the banks (Eg Cyprus crisis) or because the value of the money is rapidly deteriorating (Eg Yugoslavian Hyperinflation) or because there's some event that devalues the currency. This is by no means an exhaustive list, but it shows that different things in different places can cause crisis situations to emerge. There's some interesting work that was done by the Bank of International Settlements about the early warning indicators for systemic banking crises. Seeing what was happening in Turkey inspired me to write about bank bail ins. Along with bail outs this is something that you'll likely see in banking crises. More detail about the early warning indicators and bail in mechanisms here: https://www.lesinskis.com/bank-bail-ins.html

I also talk about this in the article but I don't think it's easy to neatly determine where currency crisis situations "start". There's at least 14 countries in the world that are in what could be the early stages of a banking and currency crisis but it's likely that people will only say they are in a crisis at a much later stage where the problems are so big they are impossible to ignore. Other places like Canada get ignored routinely but the situation there could rather easily turn into a major crisis unless something changes there.

[ClumsyPilot]

"fractional reserve banking"

It's a good post, you are correct in that we have a floating exchange rate, but we haven't had fractional reserve banking for decades.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[JanisL]

I'm aware that capital requirements have mostly taken over from reserve requirements over time (in such a way that the banking system is even less sound than the average person assumes), but the point I was making is that in all these these systems there will be liquidity issues if all the depositors were to try to withdraw their money to spend it on something at the same time.