The resulting contraction in deposits and the desire of banks to increase their reserves relative to deposits to protect themselves from the deposit withdrawals then leads to a multiple contraction in loans and deposits, as is so well describes in Friedman and Schwartz (1963), that promotes other bank failures and leads to a bank panic. As we saw earlier, banks have a special role in the financial system because they are so well suited to solve asymmetric information problems in credit markets. The decline in the number of banks and in their sources of funds to make loans reduces the ability of the financial system to solve adverse selection and moral hazard problems in credit markets, thereby causing a reduction in investment and a decline in economic activity.