A banking crisis occurs when customers withdraw large amounts of money from a bank, causing financial problems that can lead to bank failure. When this happens in numerous banks, the crisis spreads across the nation and even globally. Uncertainty in the economy or lack of trust in the bank can cause a crisis. The US recession in 2007 caused many bank failures, perpetuating the problem as banks couldn’t make new loans. A banking crisis can turn into a financial crisis when it becomes widespread.
A banking crisis occurs when bank customers start withdrawing large amounts or all of the money they have deposited at the bank at once. Since the bank operates on profits from using the money that consumers have as deposits with the bank, when a large amount of customers remove this money from the bank, it causes financial problems which can lead to bank failure.
Collectively, when withdrawals of this kind occur in numerous banks, the banking crisis spreads. Since banks in the United States are part of one banking system, all of these banks are interconnected, even borrowing money from each when needed. As the banking crisis spreads from one bank to another, this causes a banking crisis to spread across the nation. In turn, this can even cause a global banking crisis because US banks work with banks spread all over the world.
Typically, what causes a banking crisis is an uncertainty in the minds of consumers or bank customers. An uncertainty in the economic state of the country or the stock market causes consumers to rush to their banks, withdraw all their money, and keep it at home to avoid losing their money altogether. In some cases, it is a lack of trust in the bank itself because customers fear that the bank is in danger of bankruptcy.
During the US recession that began in 2007, bank failures became a common and even daily occurrence. It was a vicious circle for banks and bank customers. Mortgage foreclosures were causing numerous financial problems for the banks. As more and more banks were in danger of closing, customers made runs on the banks to get all their money out of the bank.
This perpetuated the problem because banks now did not have cash on hand to make new loans. Not being able to make new loans prevented the banks from producing new business and profiting from the interest on the loans. Without deposits and loans, banks were forced to close. In 2007-2010, bank after bank experienced these kinds of problems, causing many to be closed and seized by the Federal Deposit Insurance Corp. (FDIC).
After the banking crisis spread across the nation, international banks suffered their own banking crisis. Overall, a banking crisis turns into a financial crisis when it becomes a widespread problem. Because a banking institution offers more to the economy than just managing checking and savings accounts, when multiple banks have problems, it spreads to more areas of the financial world.
Protect your devices with Threat Protection by NordVPN
