Bank failure Flashcards
(3 cards)
1
Q
How can banks fail?
A
- Bank run - not enough liquid short term assets to meet short term liabilities
- Insolvency - not enough capital to offset losses in asset values (liabilities greater than assets)
2
Q
What can bank fails cause?
A
systemic risk - hurts other banks who were holding assets that this commercial bank was holding, eroding its value and may make them bankrupt. (2008GFC)
3
Q
What can be done to prevent bank failure?
A
- cash ratio - increasing it mean forcing commercial banks to hold enough assets to meet liabilities
- liquidity ratio -short term assets go up
- leverage ratio - enough capital held to match losses
- capital ratios - capitals to loans ratio
- reserve requirement - making sure they always have enough assets in case of major changes
