Risks and consequences of our banking system

Risks and consequences of our banking system

The banking system works in a monopoly context of money: there is only one legal tender controlled by a semi-dependent central bank, which decides monetary policy. The central bank grants licenses with very specific requirements to certain companies, traditional banking, which implies that oligopolies can be formed: in Spain, it went from 296 private banks in 1925 to 19 in 2019. Furthermore, conventional banking is the only company that You can directly access low-priced financing from central banks. This privileged access to financing contributes to the banking business model of bdv en linea rewarding risk. With access to large amounts of money through central banks, private banks can afford larger, longer-term investments, such as 30-year mortgages. To this is added that banks establish the interest on their loans depending on the investment risk, with higher interest the higher the risk. A large amount of money to invest and risk premiums are great incentives for banks to take excessive risks.

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Bankruptcy of the German bank Bankhaus Herstatt

To make matters worse, banks can lend money without having it, putting money substitutes into circulation. The second risk of the system is, therefore, in that money is being put into circulation that is not available. This risk has forced the imposition of a regulation that emerged after the flaws of the system were revealed. After the bankruptcy of the German bank Bankhaus Herstatt in June 1974, the G10 leaders sat down in 1988 to agree on basic parameters that would prevent banks from going into debt to infinity. Those negotiations were successful in the first Basel Agreement, which was then updated twice more, in 2004 and 2010, after the last major crisis, when a minimum reserve ratio of 8% was established. These agreements apply in 27 countries and territories.

Conventional banking

The third risk of the system comes from the interconnection of banks. Given that the banks are in charge of intermediating between the rests of the economic agents, a failure in the banking system can bring down the economy as a whole, a domino effect that would trigger serious economic, social and political consequences. Hence the strict control by central banks and governments. Conventional banking is a private company that lives in perpetual bankruptcy: it is only sustained by the confidence of savers. If confidence in one bank breaks, it would be possible for the rest of the banks in the system to catch on; In such a scenario, the government could be forced to limit the withdrawal of money from ATMs or close www.banesco bank branches, which is commonly known as a corralito. visit for banesco https://banescenlinea.com/

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