A Case Study of the Banking and Financial Crises

1. What is banking and financial crises?

Banking crises is a type of financial crises, when a commercial bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits, it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy. A situation in the bank runs are widespread is called a systemic banking crisis or a banking panic. 

Historical experiences of Banking & Financial crises

First, the study of banking crises has typically focused either on earlier historical experiences in some countries. During the research, we can see the banking crises is usually accompanied with long-term economy downturn, such as the Great Depression in 1930s, the big savings and loan crisis in US on the late 1980s and early 1990s and the present worldwide financial crisis. Then the Asian financial crisis came in 1997, the subprime mortgage crisis is the fourth major banking crisis since World War II. Also In 1992, Japan’s asset price bubble burst in a long time banking crisis. Around the that period, several countries in Eastern Europe joined the ranks of nations facing banking sector problems. Followed by the famous Asian crisis of 1997–1998, and then the troubles of Russia and Colombia, among others. Those countries drop in the banking crisis cycle. In the summer of 2007 when the subprime crisis in the US began in earnest, soon morphing into a global financial crisis. and by far the biggest. From the figure it show so clearly.

In some details, the reason is that banks will make lending decisions mostly based on the prediction of the market, but a long-term economy down turn will exceed the bearing capability of many borrowers, leave them bankruptcy, and consequently default to the lenders. For the present disappointing financial crisis, as far as we can see, in the UK many institutions, homes and individuals cannot afford to repay the loan, which increase the credit risk of the lenders, so lenders such as banks are unwilling to lend money. What’s more, many big banks in the UK have already suffered huge losses during the economic crisis. 

As an important primacord of global financial crisis, It have been rushing many areas of global economy; such as house price, share prices market (Northern Rock case) , interbank rates (European Central Bank case) and so many other areas. In the UK, Royal Bank of Scotland had lost £28bs in 2008 and Lloyds Banking Group had £10b loss in 2008.Both of them have been taken over by the UK government. The economic downturn in turn makes the bank to tighten the credit quantity, which made banking and financial  problem even more serious.