The banking sector crisis has been one of the most important issues to date. Banks play an important role in the stability of an economy. Banks act as the catalyst to the growth of an economy, especially for the market sector. Banking institutions are essential in acting as a vehicle for financial development.
One of the main causes of the banking sector crisis was the economic fallout. The worldwide recession had contributed greatly to the failing economic situation. Because of this, the banking policy had greatly changed and banking development was negatively affected.
Here are the reasons why there are banking sector crises and tips on how to understand them.
- Dollar depreciation. Dollar depreciation has been rampant, especially during these times of crisis. Because of this, banks have been experiencing huge amounts of losses due to lower exchange rates from other currencies. During these times, most banks offer higher interest rates for deposit accounts. This is done to resolve some of the losses stemming from depreciation.
- Mortgage debt. One of the most common reasons for a banking sector crisis is the large number of delinquent mortgage debts. Due to the economic crisis, a lot of workers have been laid-off to reduce manpower costs and to save businesses from bankruptcy. This results in a large number of foreclosures that affect the bank’s revenue. Real estate is also not doing well and it has been reported that property is devaluating. Therefore, the banks are usually not getting any profit for selling foreclosed properties. To alleviate this, most banks allow the borrower to extend their mortgage or restructure their mortgage plan. This is done with the help of thorough banking supervision and analysis.
- Investment loss. Aside from loans, banks also invest their money in other ventures like the stock market for additional profit. If the investment fails, it becomes a crisis to the bank. To resolve this, the bank borrows a certain amount of money from the government bank to increase their money reserve. This is also done to ensure that the bank can continue to function normally.
- Delinquent loans from government banks. If the bank accumulates several loans from the government bank, there is a possibility that they cannot clear their debt in time. This happens especially if most of the banks’ investments are not producing revenue. If the banks fail to pay a consecutive set number of times, they usually end up filing bankruptcy. To have this resolved, most banks tie up with other bigger banks. This is what they call a merger, wherein a bank that is on the verge of filing bankruptcy is acquired by a bigger bank. This helps the weaker bank survive, and the healthier bank acquires an investment.
During these times, the banking sector crisis is inevitable. Therefore, it is important to ensure that both the bank and its depositors understand the consequences of having these issues. Learning from it can ensure that in the future, there will be a more resilient and thriving banking economy.