Economic Terms

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.

A legal status that defines a person or institution unable to repay any outstanding debts owed to creditors.

In a banking sense this is when the banks equity capital has become exhausted and as a result they no longer have any funds available to recover losses made on their balance sheet - prompting a bank failure.

Bankruptcy most commonly occurs when the bank's assets fall in value on the balance sheet because of the presence of non-performing loans (NPLs) and this makes the bank a loss which the equity capital must cover. But the more equity capital is used up, the more vulnerable the bank becomes. Eventually (if these losses continue) the bank will run out of equity capital and it will become technically insolvent when the losses they have made on assets exceed the level of equity capital.

Bargaining power is the relative ability of parties in a situation to exert influence over each other. This is commonly seen in monopoly or monopsony market structures.

Factors that increase the difficulty at which new firms can enter into a market. In some cases this can prevent new firms from entering - making the market less contestable.

There are two different types of barriers to entry which can prevent new firms from entering and increasing competition.

Artificial barriers are barriers that have been set up by the incumbent firms already established in the market to ensure their market share and profits do not slip.

Natural barriers are barriers which exist because of the structure of the market or the resources available to firms in this specific market. There types of barriers normally prevent firms from entering costlessly.

Factors that can prevent existing firms from exiting a market e.g. long term contracts and property leases. The presence of significant barriers to exit leave a market uncontestable as it makes hit-and-run entry more difficult to undertake as a strategy, from a new entrant's perspective. This is because firms can no longer exit costlessly.

The process of trading goods and services without the exchange of money.

The diagram below illustrates the process of barter between a farmer and a builder. As long as a double coincidence of wants is present between the two economic agents then they can engage in a mutually beneficial cashless exchange of goods.

This was the main form of exchange before a monetary system was introduced in all modern economies. Barter was eventually phased out as it became inefficient due to the variety of goods available increasing as a result of specialisation in the production process.

The first capital accord introduced by the Basle Committee in 1988, to ensure that capital requirements across most developed countries were standardised and uniform i.e. all banks had to back their assets with the same percentage of capital when adjusted for risk.

This capital accord used a risk-weighted system where each class of asset would have a risk-weight attached to it so banks could calculate how much capital it was legally required to hold. Bank's were advised to hold at least 8% of their asset value in the form of capital - of which at least 50% of that must be held in Tier 1 capital.

However this accord eventually broke down when the system was attacked for not being operationally robust enough and therefore not punishing banks who held riskier loans compared to those with safe loans. BASLE II has since replaced this capital accord. 

Is a committee of banking supervisory authorities with the goal to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. Through this committee the capital adequacy requirements known as BASLE were introduced to ensure a uniformity across all banks in terms of the capital backing which was required, in light of the globalised financial world now in place.

The second capital accord to be introduced by the Basle Committee to correct and ensure that the capital adequacy requirements for banks was financially and robust enough. This was proposed in 2004 and was implemented fully by 2008 and the main difference was it ensured that banks had a higher capital charge imposed on them if they prescirbed a loan to a small company compared to a large company like Apple. This will be replaced by BASLE III in 2023.

Is the third capital accord to be introduced by the Basle Committee in 2013 and will be fully phased in by 2023. This once agin built on the foundations of BASLE II and will impose tougher capital and leverage restrictions on banks, raising the level of Tier 1 capital a bank should hold to 13.5%