For example, a boom in the Japanese economy during the First World War was interrupted by a severe stock market crash in 1920 and a devastating earthquake in 1923. To reduce the unfavourable impact to the credit system, the Bank of Japan extended loans as a lender of last resort and most likely weakened the discipline of the banking sector. These bank-runs and credit collapse are now known as the 'financial crisis' of 1927. After this incident, banking regulation was substantially tightened in Japan. Incidentally, the relative intensity of disturbances to the financial sector at present, namely in the early 1990s in Japan, is at least comparable to that of the financial crisis of 1927.
Expectations are important.
People are often motivated by fear, rumour, and panic psychology in critical situations, and accordingly behave differently from what rational expectations economists usually postulate. Economics of asymmetric information provides models that generate bank runs and financial panic even under the assumption of rational expectations by agents. Whether a financial crisis becomes serious or ephemeral depends to a considerable extent on how it is handled by monetary authorities. This is the 'moral hazard' principle in insurance, that the more insurance one has, the less motivated one is to be careful. It is on this ground that monetary authorities usually leave some doubt as to whether they will rescue markets and banks in difficulty.