Banking Crisis and Instruments to Deal with Them: Bank Intervention and Resolution of Weak Banks
Banking Crisis and Instruments to Deal
With Them: Bank Intervention and
Resolution of Weak Banks
I. Introduction
Accounting for trillions in assets worldwide, the banking system is a crucial component of the global economy. The health of an economy and the health of the banks have been strongly correlated because of critical role of the banking system as a financial intermediation, payment system etc. So there could also be a situation that the problems not related to banking system can cause a problem for bank/banks and thatmay lead to the banking crisis in the country.
In many respects, most banking crises are quite similar. Banks make increasingly risky lending decisions during economic expansions and fail to rein in their activities before a turn in the economy. Eventually businesses struggle during the downturn, fail to repay their loans, a few banks collapse and then depositors run to get their money out before their bank collapses. With the sudden outflow of money, banks curtain their lending activity, the business cycle continues to worsen, more loans go bad and more banks go bust. Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans).
Generally there are many different solutions and actions that should have been taken during the crisis, such as liquidity support or policy changes, that will mostly prevent the crisis. But in this paper we will discuss how to deal with major issues in restructuring financial institutions and resolving bankrupt banks after a major crisis and the situation is more or less stable in banking system. But of course
With Them: Bank Intervention and
Resolution of Weak Banks
I. Introduction
Accounting for trillions in assets worldwide, the banking system is a crucial component of the global economy. The health of an economy and the health of the banks have been strongly correlated because of critical role of the banking system as a financial intermediation, payment system etc. So there could also be a situation that the problems not related to banking system can cause a problem for bank/banks and thatmay lead to the banking crisis in the country.
In many respects, most banking crises are quite similar. Banks make increasingly risky lending decisions during economic expansions and fail to rein in their activities before a turn in the economy. Eventually businesses struggle during the downturn, fail to repay their loans, a few banks collapse and then depositors run to get their money out before their bank collapses. With the sudden outflow of money, banks curtain their lending activity, the business cycle continues to worsen, more loans go bad and more banks go bust. Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans).
Generally there are many different solutions and actions that should have been taken during the crisis, such as liquidity support or policy changes, that will mostly prevent the crisis. But in this paper we will discuss how to deal with major issues in restructuring financial institutions and resolving bankrupt banks after a major crisis and the situation is more or less stable in banking system. But of course
References: 1. Hoelscher, David S. And Quintyn Marc. Managing Systemic Banking Crises. Occasional Paper #224 IMF, 2003. 2. Hanson, James A. and Neyens Ruth L. “Achieving Results in Bank Lending for Bank Restructuring and Privatization,”. 3. Honohan, P., and Klingebiel, D. “Managing the Real and Fiscal Effects of Banking Crises, World Bank Discussion Paper # 428. 4. Caprio Gerard and Klingebiel Daniela. 2002. “Episodes of Systemic and Borderline Banking Crises.” 5. www.investopedia.com 6. www.wikipedia.org