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“Banking Panics & Crises”

LEARNING OBJECTIVES:

 

Money & Banking students will be able to understand:

 

  • Different types of panics and crises that are faced by commercial banks

 

  • Impacts of panics and crises on banks’ performance, stock market and stock prices

 

  • Role of central bank in analysing and identifying issues/ problems of commercial banks and design appropriate strategy for it.

 

Case:

 

Central bank being a lender of last resort is responsible for investors’ protection and financial stability. Central bank gets involved in the banking system to address commercial banks’ issues like “liquidity: availability of sufficient cash reserves to meet the demand withdrawal” and “solvency: ensure bank assets in excess of bank liabilities”. Central bank regularly lends money to the commercial banks to fulfill their funding needs.

While giving loan to commercial banks, it is very important for a central bank to identify the issue whether it is illiquidity or insolvency because it is very necessary to timely meet the demand withdrawals and payoff liabilities without any panic. Lending facility will only resolve liquidity problem and adversely affect the insolvency problem by further increasing liabilities. Any negative news/ information of a bank when reached into stock exchange market affect its stock prices and credibility.

 

Question 1:

 Which one of the two risks “Liquidity and Solvency”, is more critical and must be resolved first? Discuss.

  

Question 2:

 Does the liquidity risk of a bank is related to bank stock’s liquidity in stock exchange market?

 

(Support your answers with logical reasoning)

Note: Complete your comment within 200 words

Important Instructions:

 

1.   Your discussion must be based on logical facts.

2.   The discussion board will remain open for 3 working days.

3.   Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4.   Obnoxious or ignoble answer should be strictly avoided.

5.   Questions / queries related to the content of the discussion board, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of discussion board is over.

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