Lending declines deleveraging assets loans etc

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Unformatted text preview: c)  Unan9cipated deprecia9on of the domes9c currency –  In developing countries, most debt contracts are foreign- currency- denominated (e.g., in terms of $, €, or ¥). –  Unan9cipated deprecia9on of domes9c currency increases the debt burden of domes9c firms. –  However, assets are mostly denominated in domes9c currency and thus they are unaffected. –  As a whole, this causes a decline in net worth and the economy follows the same pa`erns. 6 Six Factors to Financial Crises: 2. Deteriora9on in financial ins9tu9ons’ B/S •  A deteriora9on in their balance sheet (e.g., incurring huge losses, asset write- downs) = a substan9al reduc9on in their capital •  Fewer resources to lend because recapitaliza9on would be difficult. → Lending declines (deleveraging) Assets Loans etc… Liabili=es Deposits Capital 7 Six Factors to Financial Crises: 3. Banking Crisis •  Banks do not carry enough cash that will meet with all requests for withdrawal. •  Fear for the safety of deposits can cause a bank panic, in which mul9ple banks, including healthy ones, fail simultaneously. •  Asymmetric...
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