There are many different roots leading to financial depressions and not every financial crisis has all the possible causes. The following 2 main reasons to cause the financial distress and lead to banking depression are the misleading of the prevailing market theory bubbles and poor regulatory framework
The hidden part of an iceberg: The market sometimes represents a biased picture in which the interpretation and predictions of market participants are placed on, as well as shown in market price. The market itself usually corrects these connections, however, misconception leads to a different way where the equilibrium point never meets (George, 2008)(related to the Financial crisis 08/2007 when home mortgages had increased dramatically with the prediction of long term rise in real estate price)
As well, For banks in order to enhance their balance sheet (asset side) , more securities and ( or) lending should be improved i.e. they have to increase the amount of borrowers. Once good credit borrowers have already made certain loans from banks, and then banks should ease their lending policy to lower credit borrowers. From here the first sign of subprime mortgage bubble can be seen.(Adrian and Shin, 2009)
As well, For banks in order to enhance their balance sheet (asset side) , more securities and ( or) lending should be improved i.e. they have to increase the amount of borrowers. Once good credit borrowers have already made certain loans from banks, and then banks should ease their lending policy to lower credit borrowers. From here the first sign of subprime mortgage bubble can be seen.(Adrian and Shin, 2009)
That misleading is the first stage of a bubble _boom which growing gradually to come to the 2nd stage _bust when things get to the boiling point and explode (George, 2008). This comes to the very first glimpse of the financial crisis (the floating part of an iceberg). Investments in those increasing assets will be illiquid and that’s the sign of banking crisis when depositors are panic and informed others
This is a chain effect; inter-bank system is frozen and leads to the result of the exposure of bankruptcy. Domino effect would be an ideal image to illustrate this situation. The more dominating the market, the larger the wave of a crisis would be
The transparent in regulatory framework also plays an important role in banking and financial crisis. Previous episodes on banking and financial crisis have shown that there are gaps in accounting system, which allow frauds to happen.
how the crisis go global
how the crisis go global
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