{"id":54814,"date":"2020-08-25T06:56:47","date_gmt":"2020-08-25T11:56:47","guid":{"rendered":"https:\/\/olduvai.ca\/?p=54814"},"modified":"2020-08-25T06:56:47","modified_gmt":"2020-08-25T11:56:47","slug":"the-anatomy-of-a-financial-crisis","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=54814","title":{"rendered":"The anatomy of a financial crisis"},"content":{"rendered":"
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The anatomy of a financial crisis<\/a><\/h3>\n<\/div>\n<\/div>\n
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In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the \u2018shock\u2019 or \u2018trigger\u2019 that initiates it.<\/p>\n

The next phase of the crisis is likely to be a global financial crisis, as we have been anticipating for quite some time (see, e.g.,\u00a0Q-Review 4\/2017<\/a>). However, few understand what a financial crisis is, though it is probably among the most feared economic phenomena of mankind.<\/p>\n

So, let\u2019s dive in.<\/p>\n

The initiation<\/strong><\/p>\n

If a banking system is sound and robust, it can usually withstand financial and economic shocks.<\/p>\n

But a banking system may be fragile. Usually this is due to high leverage levels, where banks have either lent aggressively or carry risky financial investments on their balance sheets\u2014usually both. Banks can also have a weak financial position, with chronically low profitability and insufficient reserves. As we have explained earlier, this is exactly the state the\u00a0European banking sector<\/a>\u00a0finds itself in.<\/p>\n

The onset of a financial crisis requires a trigger. The most common is a recession or the expectation of recession among consumers and investors.<\/p>\n

Recession leads to diminished income and defaults by both corporations and households. This increases the share of non-performing loans in bank loan portfolios, reducing the value of loan collateral and increasing bank risks and capital needs. As write-downs and losses increase, mistrust among other banks and depositors and investors does as well. The bank\u2019s share price will usually start to reflect this.<\/p>\n

A \u2018bank run\u2019<\/strong><\/p>\n

If suspicion spreads, banks will be apprehensive about counterparty risk and will be unwilling to lend to one another even on an overnight basis.\u00a0 If allowed to continue, this will have a calamitous impact on liquidity in money markets.<\/p>\n

\u2026click on the above link to read the rest of the article\u2026<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/section>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The anatomy of a financial crisis In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the \u2018shock\u2019 or \u2018trigger\u2019 that initiates it. The next phase of the crisis is likely to be a global […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[63,124,175,30224,281,312,4650,23877,1149,24423],"class_list":["post-54814","post","type-post","status-publish","format-standard","hentry","category-economics","tag-banks","tag-central-banks","tag-credit","tag-crisis-preparation","tag-europe","tag-financial-crisis","tag-global-depression","tag-gsn-economics","tag-preparation","tag-tuomas-malinen"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/54814","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=54814"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/54814\/revisions"}],"predecessor-version":[{"id":54815,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/54814\/revisions\/54815"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=54814"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=54814"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=54814"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}