pdf Int Banking #9

pdf Int Banking #9 - MODULE 9 Crashes Introduction In this...

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1 MODULE 9 – Crashes Introduction In this Module, the causes and consequences of major banking crashes will be discussed and the focus will be on the issue of contagion. We will touch upon some of the rules and regulations enacted after the Great Depression of 1929. Furthermore, a bank run, its history and consequences will be elaborated upon. We will discuss major preventive tools put in place to deter bank runs and financial panic. We will elaborate on some of the modern time financial crises and the role of the international regulatory and supervisory authorities such as the IMF. Objectives Upon successful completion of this module, the student should be able to: • Discuss the history of bank crashes. • Examine the causes, consequences and remedies of bank crashes. • Articulate the contagion issue and bank runs. • List rules and regulations enacted after the Great Depression and their objectives. • Articulate the ripple effects of a bank run. • Describe and define prevention tools available to deter bank crashes. • Articulate the role of the IMF in relation to preventing bank crashes and financial panic. W ith the inevitability of globalization of the financial market, economic system, and international trade, the possibility of bank failures becomes a major issue in formulating operational policies by the IB system. The crisis that can cause bank crashes is referred to as a form of contagious disease whose transmission does not recognize limitations or boundaries. A simple whisper from one entity to another entity concerning lack of reserves in one financial intermediary could have disastrous consequences throughout the financial market worldwide. The history of the banking system can bear testimony that on many occasions the world community experienced banking failures that caused contagion. In modern times, a good example of contagion occurred during the Asian banking crisis that affected many countries like a domino effect. Contagion begins with a bank run which is lack of liquidity by the bank to satisfy customers’ needs. For further information, please see Footnote #1 . We must not forget the condition of the banking system during the Great Depression that was caused by the stock market crash of 1929. Even though there are many arguments about the cause of the Great Depression, one cannot forget about the role of the Federal Reserve. The Federal Reserve was established in 1913 through the Act passed by the US Congress. The role of the Federal Reserve, also known as the Central Bank of the United States, is to conduct monetary policies to correct the deviations caused by macroeconomic variables, such as unemployment and inflation, which represent themselves through fluctuations in the normal economic growth path. This is known as the business cycle. By expanding the money supply (expansionary monetary policy), the Federal Reserve stimulates aggregate demand, and thus remedies the recession. By contracting the money supply (contractionary monetary policy), the
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pdf Int Banking #9 - MODULE 9 Crashes Introduction In this...

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