Banking in Crisis

Abstract

As you may have guessed or if you were living in almost any part of the world over the past twenty years, as experienced in everyday life, banks do not always do well. There have been many cases that banks have performed bad, and were either forced to shut down, merge with another institution, or even rescued using government money. Thus, in this chapter, we will delve more into the reasons banks fail as well as into the effects this can have on the economy. In particular, the chapter distinguishes “usual” recessions from banking crises, with liquidity being heavily affected as a result of banks being hurt financially, through write-offs (i.e. losses) and loan loss provisions as the number of non-performing loans increases. Through examples illustrated with the help of bank balance sheet graphics, these effects are overviewed and elaborated upon. The usual responses of central banks in downturns are also examined.