Since every bank borrows short term and lends long term, they are vulnerable to bank runs. Banks make long-term loans or investments, but they borrow from depositors who can withdraw money at any time. Consequently, if depositors suspect that the banks cannot pay them back, they rush to withdraw their money. But since the deposits are lent out, or invested in non-liquid assets designed to earn money over the long run, they are not available for withdrawal. And if a bank cannot pay back its depositors, it goes out of business. This is why governments insure deposits. And, normally, insurance prevents bank runs because investors know that the government will guarantee their deposits. But in this case, Iceland's deposit guarantees were several times its entire national income. Consequently, the government insurance did little to reassure depositors. ... When the bank run came, everything fell apart. ... Today, Iceland is broke.
I found it curious that he tacitly supported deposit insurance by governments given his largely Randian leanings in the textbook.