Saturday, May 19, 2012

Why do bank bankruptcies have a negative impact on their competitors?

If an industrial company goes belly up, its competitors stock price rise. If a bank goes bankrupt, its competitors do not always benefit. Why?

When a bank goes bankrupt, its competitors gain in terms of available market share, just as is the case in other industries. What differs is that the banking system is heavily reliant on trust. Since it is hard to determine what exposures the rest of the banking sector has to a failing bank, we must assume that all banks may be exposed to losses when there is a bankruptcy in the financial sector.

This leads to an increased cost of lending for banks In extreme cases it can mean that lending stops completely, leading to a liquidity crisis.

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