What happens to the way a bank operates after a banking crisis?

-What happens to the way a bank operates after banking crisis

No . of pages : 11

What happens to the way a bank operates after banking crisis

Bank failures are widely perceived to have greater adverse effects on the economy and thus are considered more important than the failure of other types of business firms . Banks failure are perceived as more damaging than any other organizations failure because of its image and credit in the eyes of public . Thus failure of any individual bank introduces the possibility of system failure and has been

the perception in almost every country at any point of time regardless of its economic or political structure . So bank failures have been and continue to be a major public policy concern in all countries . Many nations have experienced bank failures with very high cost , which can lead to systemic risks . Systemic risk is perceived to occur because all economic agents are interconnected . This interconnection provides a chain along which shocks to any one agent are transmitted to others . The personal or institutional balance sheet of each agent includes assets that are either liabilities of other agents or whose values depend on the behavior of other agents . Likewise , the liabilities of each agent are the assets of others . If an agent suffers a decline in the value of its assets , the value of its capital will decline . This will likely reduce the spending behavior of the agent and thereby also the income and asset values of other agents . Moreover , if the loss in asset values were sufficiently large to exceed an agent 's capital , it would cause the agent to default on its debt obligations . This , in turn , will reduce the values of assets on the balance sheet of the agent 's creditors and ignite a chain reaction of reduced spending and defaults

Losses to shareholders are generally viewed as less serious than losses to creditors , who are assumed more risk averse and often consider themselves not fully compensated for any losses they may experience This is particularly true for depositors , who generally view these funds as the safest and most liquid component of their wealth portfolios . Thus their "harm " is greater and their response in rearranging their portfolios to avoid further losses is more severe . However , it should be noted that defaults lead primarily to redistributions in wealth rather than to aggregate reductions , as the creditor 's loss is the debtor 's gain . But the economic impacts are unlikely to be offsetting . The consequences of the losses outweigh those of the gains . The causes of bank failure are numerous , in theory , and include regulation of banking activities such as forbearance asymmetric information lending to a moral hazard problem and connected lending . Bank failures are usually followed by unfavourbale consequences on stakeholders outside the failed bank themselves . Some times the consequences are felt by the non-banking system as a whole . A failure can result in much harm to employment earning , financial development and other associated public interests (Smith...