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Chapter 9

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Drawing on the specific examples outlined in your text (Chapter 9), discuss the leading indicators for the banking crisis? what are the regulatory mechanisms that have been put in place by leading markets to mitigate this risk? What are the local experiences?

A banking crisis is defined as a situation which the value of financial institutions or assets drop rapidly. a financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution. A financial crisis can come as a result of institutions or assets being overvalued, and can be made worse by investment behavior. A rapid string of sell offs can further result in lower asset prices or more savings withdrawals. If left unchecked, the crisis can cause the economy to go down into a recession or depression. There are a number of causes for banking crisis outlined in the text, it is also said that banks are more vulnerable to failures than other companies. This is because they are more fragile than many other firms and more open contagion. There are three reasons to support this view: Low capital to assets ratios (high leverage), which provides little room for losses; Low cash to assets ration, which may require the sale of earning assets to meet deposit obligations; and High demand and short term debt to total debt (deposits) ratios (high potential for a run), which may require hurried asset sales of opaque and non-liquid earnings assets with potentially large fire-sale losses to pay off running depositors.
There isn't one specific reason for bank crashes, crashes occur for a number of reasons. Reasons such as after a long calm conditions marked by fierce competition between financial institutions, long credit cycles where banks have…...

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