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Banking Crisis

When confidence in the banking system is undermined because many banks have experienced liquidity problems, leaving them in a position where they are unable to borrow money. When this happens it will have hugely negative consequences for the economy. This is because a crisis will mean banks reduce lending so that the availability of credit  in the economy reduces and this has negative impacts on private investment and consumption. If a crisis persuades international investors to repatriate capital, a crisis could also lead to a damaging devaluation in the exchange rate of the host currency.   

The nature of a banking crisis means that problems can start with small number of banks and spread through the whole financial system. This is why struggling banks often receive a bailout from the government to prevent systemic problems in the wider economy.


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