Bankers have a reputation for conservatism in politics, dress, and business affairs. Is there an economic rationale for this conservatism? Explain.

What will be an ideal response?

There is an economic rationale for this conservatism. Checking deposits are pure fiat money. These deposits are backed by nothing more than a particular bank’s promise to convert them into currency on demand. If people lose trust in a bank, then it will lead to the danger of a run. The danger of a run on the bank has induced bankers to keep prudent norms and to lend out money carefully. They achieved the prudence through two principal ways. First, they maintained a sufficiently generous level of reserves to minimize their vulnerability to runs. Second, they were cautious in making loans and investments because any large losses on their loans would undermine their depositors’ confidence.