Banking Essay

2507 words - 10 pages

AbstractThis paper analyses the significance of bank runs in today's banking system. The first section researches some of the origins that cause bank runs to take place and its effect it has on the country's economy. It is found that some of the causes have been a result of:· Decline in the terms of trade· Economic growth and inflation rates· Bank-lending booms· Decline in equity prices· Increase in bank liabilitiesThe second part of this research deals with policies in which the central bank should adopt once a systemic crisis is imminent. The research focuses on Lindgrens studies and thus there is a strong influence of the procedures undertaken from banking crises in Asia. It is found that these policies are achieved through the use of liquidity support, blanket guarantees, capital controls and debt restructuring, and closure of financial institutions.The final part of this analysis suggests a bank-restructuring program is important to alleviate the problem associated with a bank crisis. It has been found through the paper of Santomero and Hoffman that there is three possibilities one can implement to regain the health of the bank. These are the continuing operations option, merger option, and the final payout option, which involves liquidating the assets of the bank to pay off creditors. Several tools in the continuing operations option are that of forbearance, nationalization of the institution, & regulatory control. In terms of the Merger option it is necessary to have a good balance sheet position and thus a good-bank, bad-bank split is necessary for future mergers.Banking crises have been significant in today's banking sector. According to Lindgren(1996) it has been reported that over the 1980-96 period, at least two-thirds of International Monetary Fund(IMF) member countries has experienced these banking crises.Caprio and Klingebiel's (1996) research suggested that banking crises in developing countries have been far more severe during the past 15 years than those in industrial countries. Their estimates imply approximately a 10% difference between the developing and industrialized countries. Such of these include - Spain 17%GDP (Industrial) to losses of greater or equal to 25% GDP(Argentina, Chile, and Cote d'Ivoire).The result of banking crises in developing economies is also costly for industrial countries. The factors behind this implication are that developing countries purchase about 25% of industrial country exports. Thus, a banking crisis will strain the ability to service and to repay private capital inflows, and eventually add to the liabilities of developing country governments.What are some of the causes and consequences of banking crises?As banks typically borrow short and lend long, they operate with high leverage (low capital) and on a fractional reserve basis. Thus, according to Goldstein and Turner, if volatility changes the relationship between the values of bank assets and...

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