Causes and Consequences of Systemic Financial Crisis Free Essay Example, 5000 words

Of all the types of risks to banks, the focus here is on liquidity risk, which is the inability to obtain funding to finance operations, though it may be linked to interest-rate and credit risk. Although most of the analysis covers banks, these concepts can also be applied to other financial institutions and even securities markets. Any event, however extraneous, but including runs on or insolvency of other banks can according to Diamond and Dybvig (1983), provoke such runs. Such an effect might be particularly potent for banks, which are creditors of the bank in distress. Runs are also likely when the equity of banks is a small proportion of balance-sheet totals, as depositors fears of moral hazard increase, assuming managers actions cannot be perfectly monitored (L. And, more generally, in the presence of asymmetric information, which arises from banks creation of non-marketable assets, runs may be triggered by any event that makes depositors change their beliefs about banks riski ness. These might include leading indicators of recession or a decline in net worth of a particular class of borrowers. We will write a custom essay sample on Causes and Consequences of Systemic Financial Crisis or any topic specifically for you Only $17.96 $11.86/page