BANKING CRISIS

Why There Are So Many Banking Crises?

[Name of College]

Why There Are So Many Banking Crises?

Introduction

If the economic health of any country is to be assessed, than one must see the stability of banking sector (Sloan, 2008). Banking sector is the key regulator of any economy (Squires, 2004), whereas, an effective and efficient banking system reflects sound condition of economy. Besides the crucial role banking sector can play in the uplift of any economy, this sector like any other sectors have passed through several crises. The causes of banking crisis are many and different in nature. The recent event of banking crisis can be trace from the Northern Rock Bank panic in the United Kingdom, the fifth largest mortgage lender of the country, as the bank confront funding problems which activated the first run on a British bank in the century. However, the banking crisis is not a new phenomenon, as a fact sheet issued by IMF in 1997 reveals that the world has witnessed fifty one borderline crises in about forty six different countries and 112 systematic banking crises in 93 states, in between 1975-1995. In the late 80s United States also experienced Savings and Loan crisis which cost the taxpayers more than $150 billion. Other countries have also faced the systematic banking crises which include Russia, Turkey, Argentina, South Korea, Indonesia and several other countries. (Djelic, and Sahlin-Andersson , 2006)

The causes of banking crises are many and varied in nature, which demand detailed study on individual causes. However this essay would briefly defined the various but main causes and their effects on the different economies in particular banking crises in Europe would be the center of this study. The main question this essay would attempt to answer is why there are so many banking crises and after the analysis of causes and its effects, in the conclusion few recommendations would also be suggested as how countries can avoid banking crisis.

Banking Sector Crises: Definition

To reach an agreed definition of the concept of banking crisis is a difficult task, as to unify different thoughts of the scholars to one single definition. For example, some authors, (Bagehot, 2009) define a banking crisis as a situation in which doubts about the solvency of banks increases which leads to a massive withdrawal of deposits, or the requirement of a large support liquidity to the monetary authorities, or a sharp rise in interest rates in the short term, or a combination thereof.

Similarly, (Alexander, Dhumale and Eatwell, 2006) identify a banking crisis as a situation in which bank maintains one or more combination of the following conditions: when the ratio of nonperforming assets to total assets of the banking system exceeds the cost of rescue operations for the banking system by more than 21 per cent of GDP, as this results in large-scale nationalization of banks. When there are massive withdrawals of deposits from bank emergency measures aimed at freezing the monetary authority allows prolonged closures of banks to prevent the withdrawal of deposits ...