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The Banking Crisis: A Brief History

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Written by   163
11 months ago


The following analysis focuses on the collapse of five of the major Brazilian banks (Itau, Banco do Brasil, Caixa Economica Federal, Santander, and Banco Bradesco) that collapsed in August and September of 2014. Prior to the crisis of the 5th largest Brazilian bank, the BM&FBovespa, the banking system was being orchestrated by the four largest private financial institutions (irrespective of their origination) and the nation's largest state-owned bank, Banco does Brasil (the largest bank in the world), which acted as an export partner and a domestic financial institution.


The history of the banking crisis is closely linked with economic expansion. The banking crisis tends to emerge during times of expansion of credit, for example in the boom-bust cycle. There are two basic reasons that drive up credit growth;

  • Increase in aggregate demand.

  • Increase in the amount of wealth owned by banks.

Both these factors add liquidity to the banking system, which increases the chances of the banks to lend funds. However, once this liquidity influx results in a credit boom, these banks tend to get overextended, and ultimately become insolvent. The Biggest Banking Crisis in History took place in the U.S. in 1929.

The 2007 Crisis

The emergence of the crisis refers to the period in the history of the global financial system immediately following the collapse of Lehman Brothers in September 2008, the triggering of the Financial Crisis, the crisis of confidence in the financial system, and the subsequent recession and financial crisis.

The crisis was caused due to the sudden collapse of Lehman Brothers on 16 September 2008, which triggered panic across global financial markets and was the subject of crisis management by the US government, the International Monetary Fund, and central banks in developed and emerging economies.

The Financial Stability Board

The Financial Stability Board (FSB) is an international financial regulatory body created in 1996 by the G20 countries. Central Banks The major central banks of the world are the primary regulators and supervisors of banking, commercial lending, currency exchange, and interest rates.

The members of these central banks are the central banks of the G20 countries. Frequent Banking Crises & Dodd-Frank Legislation Many financial analysts blame the US government for the 2008 crisis.

Dodd-Frank Act is just one among the many measures taken by the government to regulate the US financial sector. However, experts believe that the Volcker Rule introduced in the Dodd-Frank Act remains the most important reform, which will prevent taxpayer bailouts.

Causes of the banking crisis

Clinical Postulate: Money never loses its value, only the debt. Money Illusion: Those who have debt are treated with contempt. Those who do not have debt are treated with pity. The money illusion is the belief that the value of money is determined by the market price of goods and services, or that they do not fluctuate.

This belief was common in the early capitalist era when bankers made loans to entrepreneurs who promised to repay them with their profits. In reality, these loans could be called back at any time, for instance, if the entrepreneur defaults on his obligations. This is why during the period of the great depression (depression) these debts led to economic ruin. In the current capitalist era, credit cannot exceed money.

We don't know the true extent of this crisis. However, what we do know is that the vulnerability of Irish financial system in 2008 resulted in losses of more than 65% to Irish banks. The spillover of the crisis from Irish banks, including the failure of Anglo Irish Bank (AIB), led to the collapse of Ireland's financial system.

Eventually, the Irish government, along with the European Central Bank, had to inject more than 66 billion euros to prevent the Irish Republic's collapse. A few days later, the Irish government had to request for a bailout, which is now approaching €120 billion. Bank of Ireland, AIB, and Ulster Bank together contributed more than 60% to the Irish government's rescue package. The total national output of the Irish Republic has been reduced to approximately 48.

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