Banking Crisis Happened After The European Currency Crisis

By Author: tomas
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... exposed. Apart from Greece, the euro-zone countries a significant increase in bad debts the banks of Ireland, the Government had shot assistance, the Irish government announced in March 30 on banking rescue plan, acquisition of a large number of non-performing loans. In Greece, Ireland, under the impact of banking crisis, a crisis further exacerbated the euro, the euro continued to decline.
In fact, commercial banks loans are short by a long and highly leveraged financing. If the economic downturn and decline in domestic income, domestic banks and borrowers ability to repay the loan down, will affect the bank's asset quality, leading to banking crises. Exchange rate fluctuations will also affect the bank's financial exposure, sudden dramatic changes in banks are easily to make banks in trouble.
First of all, because of the economic decline in the quality of bank loans may decrease. During the expansion in the economy, many borrowers are short-term profit, and therefore different quality loans and bad credit is difficult, banks need for maximizing profits, often to excessive credit creation, which has a large number of them do not security, finance, banking crises may lead to later. When the economic recession, bank customers found repayment difficult, and banks are tightening credit for a safe and aggravated the incidence of non-performing loans, once a large number of loans into performing loans, the banks crisis. At the same time in an open economy, large capital flow also contributed to the expansion of credit and capital flow more and more countries, the rapid expansion of the commercial banking sector; and once a stagnant economy, the rapid withdrawal of foreign capital would aggravate the tightening effect ,If such a situation arises in Iceland. If the bank loans in the rising phase is to support short-term debt, then a more serious problem. Therefore, high loan period, loans increased; when the economy is in decline, non-performing loans increased, the crisis. Open economy, the rapid flow of capital, the bank increased the risk, banking crises more likely.
Followed by currency depreciation increased the debt burden of foreign currency. Devaluation led to an increase in foreign currency income or loss, depending on the banks began to foreign currency positions. If the bank foreign currency liabilities exceed its foreign currency assets, banks will have foreign currency losses. Such as the 1994 Mexican financial crisis, even before the crisis, bank loans have relatively high, the peso crisis exacerbated the situation, two months before the crisis, problem loans increased by about 30% .
Moreover, as banks become more involved in non-productive assets such as real estate, stocks, changes in the prices of these assets depends on money supply more than the basic intrinsic value. Up of the economy, promising investors, real estate and stock prices rose, and by economic stagnation, the decline in the price of those assets usually in the decline in economic indicators. This situation primarily through the banking crisis intensified following possibilities: First, the bank held in the economic rise of a large number of such assets; Second, a considerable portion of bank loans to customers is to invest in such assets; Third, because banks customers even if the loan is not the purpose of investment to such assets, they often also stocks or real estate as collateral, because high concentration of loans, asset price reduction results in the market value of mortgage assets decline, further aggravated the problem. And encourage expansion in bank lending, as large amounts of capital flow to real estate and the rise of stock price bubbles increase rapidly in the fall of the withdrawal has to burst the bubble rapidly increased the likelihood of banking crises. Under the impact of the crisis in confidence in the stock and real estate prices decreased greatly, leading to bank losses. In a crisis, real estate prices has two main effects on the banking side. First of all, most banks have mortgage loans, real estate prices to reduce the loan's collateral value. Second, if the macroeconomic impact of house prices fall, even if banks do not invest directly in real estate, but the bank may lend to a construction company, real estate prices may lead to the deterioration of the solvency of the company declined, which may also be a banking crisis a significant problem. If April 1 Central Bank of Ireland Patrick pointed out that in the real estate market for the better, all banks will be placed on market share than the possible risk of a more important role, crazy credit is causing the banking crisis the main reason.
European banking crisis will affect the final adjustment of the pace of interest rate, because interest rates will affect the bank's net asset value. Interest rates may lead to decline in value of bank debt bonds, the number of drop depends on the duration of these bonds. Rise in interest rates or increase the interest income, or reduce the interest income, depending on the duration of assets relative to liabilities. If the average duration of assets exceeds the average duration of liabilities, net interest income will decrease. Decline in the value of bank assets is an important aspect of the banking difficulties.