Money and Banking

The institutional structure of developing market debt
markets interacts with currency depreciation to drive
economies into full-fledged financial crises. A currency
crisis, and the resulting devaluation of the currency,
causes the balance sheets of businesses to deteriorate,
resulting in a dramatic increase in adverse selection and
moral hazard issues. Concurrent currency and financial
crises are referred to as "twin crises" by economists.

Inflation can rise as a result of a currency's depreciation.
In contrast to central banks in advanced countries, most
emerging market countries' central banks have minimal
trust as inflation fighters. As a result, after a currency
crisis, a fast depreciation of the currency puts immediate
upward pressure on import prices. Actual and predicted
inflation will almost certainly rise sharply, causing
domestic interest rates to climb. Because enterprises are
now more reliant on external capital to finance their
investments, the increase in interest payments causes
reductions in cash flows, which leads to increased
asymmetric information concerns. According to this
asymmetric information study, the increase in adverse
selection and moral hazard concerns that result leads to
a decrease in investment and economic activity.

The economy continues to deteriorate, as indicated in
Figure 8.7. Many debtors are unable to repay their loans
as a result of the collapse in economic activity and the
degradation of cash flow and business and household
balance sheets, resulting in significant losses for banks.
Interest rate hikes have a detrimental impact on the
profitability and balance sheets of banks. The rapid
increase in the value of their foreign-currency-
denominated liabilities following the devaluation is even
more worrisome for the banks. While a result, bank
balance sheets are stretched on both sides, with the
value of assets falling as the value of liabilities increasing.

In these circumstances, the banking system is more likely
to experience a banking crisis, with numerous banks
likely to fail (as in the United States during the Great
Depression). In the aftermath of the crisis, the banking
crisis and the contributing causes in the credit markets
explain a worsening of adverse selection and moral
hazard issues, as well as a further fall of lending and
economic activity.

Sequence of Events in Emerging-Market Financial Crises The solid arrows trace the sequence
of events during a financial cri sis. The sections sepa rated by the dashed horizontal lines
show the different stages of a financial crisis



Banking Crises Worldwide

Financial Crisis
EcoXplorer 7

A financial crisis is any of a broad variety of situations in which some
financial assets suddenly lose a large part of their nominal value. In the
19th and early 20th centuries, many financial crises were associated
with banking panics, and many recessions coincided with these panics.

WHAT IS FINANCIAL CRISIS? ASYMMETRIC INFORMATION
AND FINANCIAL CRISIS



POLITICAL ECONOMY OF DYNAMIC OF FINANCIAL CRISIS IN
THE BANKING CRISIS ADVANCE ECONOMIES




DYNAMICS OF FINANCIAL CRISES IN
EMERGING MARKET ECONOMIES

WHAT IS FINANCIAL CRISIS? HOW ASYMMETRIC INFORMATION
EXPLAINS BANKING REGULATION




Financial Crisis

POLITICAL ECONOMY OF DYNAMIC OF FINANCIAL CRISIS IN
THE BANKING CRISIS ADVANCE ECONOMIES




Financial Crisis

DYNAMICS OF FINANCIAL CRISES IN
EMERGING MARKET ECONOMIES

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Q1:
Why is a financial crisis expected by 2020?

Q2:

What could lead to another global financial crisis?

Q3:

How can we call the current banking model after the financial
crisis?

WEB References

https://www.coursera.org/lecture/global-financial-
crisis/question-and-answer-Xms49

Introduction to the financial crisis

https://www.investopedia.com/articles/economics/0
8/currency-crises.asp

What is the financial crisis

http://www.fundsupermart.com.my/main/research/-
View-The-US-Financial-Crisis-83

The US financial crisis

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