Banking Crisis
A banking crisis refers to a situation where a large number of banks or financial institutions experience significant financial distress or fail altogether. This can lead to a loss of confidence in the banking system, causing widespread panic and economic instability. Banking crises often result in government intervention to stabilize the financial sector and prevent further economic damage.
7 Key excerpts on "Banking Crisis"
eBook - ePubBanking Crises
Perspectives from the New Palgrave Dictionary of Economics
- Garett Jones, Garett Jones(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
...Research has shown that the banks that failed were exogenously insolvent; solvent Chicago banks experiencing withdrawals did not fail. In other episodes, however, bank failures may reflect illiquidity resulting from runs, rather than exogenous insolvency. Banking crises can differ according to whether they coincide with other financial events. Banking crises coinciding with currency collapse are called ‘twin’ crises (as in Argentina in 1890 and 2001, Mexico in 1995, and Thailand, Indonesia and Korea in 1997). A twin crisis can reflect two different chains of causation: an expected devaluation may encourage deposit withdrawal to convert to hard currency before devaluation (as in the United States in early 1933); or, a Banking Crisis can cause devaluation, either through its adverse effects on aggregate demand or by affecting the supply of money (when a costly bank bail-out prompts monetization of government bail-out costs). Sovereign debt crises can also contribute to bank distress when banks hold large amounts of government debt (for example, in the banking crises in the United States in 1861, and in Argentina in 2001). The consensus views regarding banking crises’ origins (fundamental shocks versus confusion), the extent to which crises result from unwarranted runs on solvent banks, the social costs attending runs, and the appropriate policies to limit the costs of banking crises (government safety nets and prudential regulation) have changed dramatically, and more than once, over the course of the 19th and 20th centuries. Historical experience played a large role in changing perspectives toward crises, and the US experience had a disproportionate influence on thinking...
eBook - ePubFinancial Stability and Central Banks
A Global Perspective
- Richard Brearley, Juliette Healey, Peter J N Sinclair, Charles Goodhart, David T. Llewellyn, Chang Shu, Richard Brearley, Juliette Healey, Peter J N Sinclair, Charles Goodhart, David T. Llewellyn, Chang Shu(Authors)
- 2001(Publication Date)
- Routledge(Publisher)
...Yet large amounts of government aid are provided to rescue banks in financial distress and banks are subject to considerable regulatory oversight to limit the likelihood that such government assistance will be called upon. Thus, falls in asset values are regarded as having wider and more serious consequences if they occur in the banking system rather than elsewhere in the economy. It is these additional costs, rather than the amount of the loan losses, that both constitute the costs to society of a Banking Crisis and justify regulation. The role of bank regulation is to correct a market failure, which may either arise because the insolvency of a bank involves social costs that are ignored by a value-maximising bank management or because agents are subject to a co-ordination problem. 10 There are three commonly suggested ways that this market failure could come about. The first arises from banks’ central role in operating the payment system. The second stems from the way that a Banking Crisis may restrict credit and accentuate a fall in economic activity. The third potential for market failure comes from the fragility of bank deposits and the costs of monitoring bank solvency. On the first issue—the operation of the payment system—there appears little to be said. If a serious loss of confidence in the banking system were to lead to a large net loss of deposits and a flight to cash, the consequent disruption to the payment system would severely damage trade. Such dangers, however, are most likely to be associated with war or acute domestic unrest rather than with simply a weak regulatory system. The second way that a Banking Crisis may affect economic activity is if it results in credit restrictions. 11 A negative shock reduces bank profits and therefore its equity capital. If this leads it to reduce lending, the economic shock may be accentuated. Of course, the bank could raise additional equity to maintain its lending...
eBook - ePub- Kevin Deane, Elisa van Waeyenberge, Kevin Deane, Elisa van Waeyenberge(Authors)
- 2020(Publication Date)
- Bloomsbury Academic(Publisher)
...10 WHAT CAUSES ECONOMIC CRISES? AND WHAT CAN WE DO ABOUT THEM? Bruno Bonizzi and Jeff Powell Introduction Countries’ growth paths follow the cyclical fluctuations of business activity (so-called business cycles), regularly experiencing slowdown and sometimes entering recessionary periods. A crisis, in contrast, is marked by the suddenness of the descent into recession and the prolonged and often-painful nature of its duration. A crisis can be catalysed by any of a number of factors. Boom and bust in financial asset prices, particularly the stock markets, are a fact of life. Governments around the world, especially the developing world, sometimes run into difficulties servicing their debt. And currencies sometimes fluctuate dramatically, pushing domestic residents into financial troubles. Few crises, however, were as serious as the global financial crisis that started in 2007/08, which, in a way, represented a mix of all the problems described above. It started in a segment of the US financial sector, but financial losses piled up and led major financial institutions to insolvency, first in the US and then internationally. International financial investments declined dramatically, with global investors desperately trying to store their wealth into safe US government bond assets, inducing a generalised global asset price collapse and sharp depreciations of many currencies against the US dollar. Governments were forced to intervene to save insolvent banks, becoming heavily indebted in the process. As this financial meltdown unfolded, the crisis extended to the rest of the economy, consumption and investment collapsed, unemployment rose: a Great Recession ensued in the world economy...
eBook - ePubFrom Good to Bad Bankers
Lessons Learned from a 50-Year Career in Banking
- Aristóbulo de Juan, Daniel Duffield(Authors)
- 2019(Publication Date)
- Palgrave Macmillan(Publisher)
...Be this as it may, it would be very difficult to establish in general terms the proportions in which it is wider economic conditions or bad management that trigger banking crises. This can only be done by examining each country and bank individually. It could, however, be said that macroeconomic variables outweigh microeconomic factors in ‘systemic’ crises, while the latter are more important in isolated bank failures. In any event, ‘systemic’ crises generally involve more severe individual difficulties for some banks because they are badly run. These crises are often ignored, however, or are lumped in with the rest. We may conclude, then, that macroeconomic factors are usually accompanied by microeconomic ills in situations of both systemic and individual crises. 7. Though it has been said that regulation can sometimes magnify the incentives to indulge in risky management practices, this author believes that poor prudential regulation and lax supervision are among the key reasons for bank failure, because the absence of strict controls and appropriate corrective measures creates a breeding ground for bad management. 8. Bad management, with all of its implications for a bank’s financial health, can take root in many different circumstances, but two typical situations stand out. 8.1. There is the moment when a new banker arrives on the scene, either by creating a fledgling bank from scratch or by acquiring an existing institution. Prevailing policies, systems and practices may prove inadequate at such times, and sometimes the funds used by the aspiring banker for his venture, whether it takes the form of a new institution or an acquisition, are at least guaranteed, and maybe even provided, by the bank itself. 8.2. Then there is the case of veteran bankers who continue at the helm of existing banks but cannot keep up with changes in fast-developing markets...
eBook - ePub- Martin Feldstein(Author)
- 2009(Publication Date)
- University of Chicago Press(Publisher)
...A financial crisis occurs when there is a generalized need to make position by selling out position, which results in a wide and large fall in asset values. As a result, the solvency, on a mark-to-market valuation, of a wide array of financial institutions is compromised. This leads to a spread of refinancing problems. A financial crisis leads into an economic crisis when investment declines so that a decline in profits as well as output, employment, and wages takes place. The decline in profits leads to both a further fall in asset values (the numerators in the capitalization relation fall) and a further decline in the ability of units to meet their financial commitments. In such an environment a sharp fall in commitments for the financing of investment takes place. Further declines in employment, output, wage incomes, and profits follow. With a lag, unemployment and idle capacity lead to a fall in wages and the prices of investment output. But in a world where debts denominated in money are large, declines in wages and prices may make things worse, not better (Caskey and Fazzari 1987). Why “It” Hasn’t Happened Yet Apt intervention can abort the process I have sketched at two points. One is that units can be refinanced, so they have no need to try to make position by selling out position. This prevents a sharp and generalized fall in asset prices. The spread of mark-to-market insolvency to units that are not in an immediate need for refinancing will not take place. Refinancing banks and key financial market players that are having trouble making position is the basic central bank lender-of-last-resort operation. Presumably such refinancing takes place when dire systemwide repercussions are believed to be imminent if refinancing is not undertaken. In various embryonic financial crises since the 1960s the Federal Reserve, specialized agencies such as FDIC and FSLIC, and the U.S...
eBook - ePub- Victor A. Beker(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...9 Financial crises and economic theory Pre-Keynesian models of financial crisis Since the 19th century, economists have developed models to try to explain economic crises. John Steward Mill and Karl Marx, among others, advanced different explanations of these phenomena. Mill asserted that there are recurring periods of “over-trading” and “harsh speculation” followed by periods when establishments are shut up and people are deprived of their incomes. According to Marx, crises are the result of the contradiction between the tendency of the rate of profit to fall and the impetus to accumulate capital. Production accelerates to compensate for the decline in the rate of profit; this finally results in overproduction of commodities and the beginning of crisis. However, financial crises as we know today are essentially a 20th century phenomenon. For this reason, it is perhaps Wicksell the first economist who should be mentioned in connection with the subject of financial crises. In the Wicksellian approach, dynamic economic processes are explained by the interaction of two rates of return, which typically sectionerge. One is the money interest rate and the other one the natural rate of return which is determined in the real sphere. Whenever banks have an excess of reserves, they will decrease the nominal rate of interest to increase their loans. As soon as the money interest rate is lower than the natural interest rate, a cumulative investment process is triggered; the economy will come into a situation of overheating. A money interest rate below the natural interest rate, however, is a disequilibrium phenomenon, signaling to would-be investors a greater willingness than in fact exists on the part of agents in general to sacrifice current consumption for the sake of increasing it later. The money that banks create as they make loans enables those who borrow from them to outbid others for resources, forcing saving upon them...
eBook - ePubThe Bank Credit Analysis Handbook
A Guide for Analysts, Bankers and Investors
- Jonathan Golin, Philippe Delhaise(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...In contrast, nonfinancial firms, with a few exceptions, are lightly regulated in most jurisdictions, and governments generally take a hands-off policy toward their activities. In most contemporary market-driven economies, if an ordinary company fails, it is of no great concern. This is not so in the case of banks. Because they depend on depositor confidence for their survival, and since governments neither want to confront irate depositors, nor more critically, contend with a significant number of banks unable to function as payment and credit conduits, deposit-taking institutions are rarely left to fend for themselves and go bust without a passing thought. Even where deposit insurance exists and depositors remain pacified, the failure of a single critical financial institution may be plausibly viewed by policymakers as likely to have a detrimental impact on the health of the regional or national financial system. Moreover, the costs of repairing a Banking Crisis typically far outweigh the costs of taking prudent measures to prevent one. Governments therefore actively monitor, regulate, and—in light of the importance of banks to their respective economies—ultimately function as lenders of last resort through the national central bank, or an equivalent agency. Owing to the privileged position that banks commonly enjoy, their credit analysis must give due consideration to an institution’s role within the relevant financial system. Its position will affect the analyst’s assessment concerning the probability, and degree, of support that may be offered by the state—whether explicitly or more commonly implicitly—in the case the bank experiences financial distress. Making such assessments not only calls for consideration of applicable laws and regulations, but also relevant institutional structures and policies, both historic and prospective...
