Global Bank Regulation: Principles and Policies

Chapter 3

Collapsing Dominos and Asset Price Spirals

So far we have concentrated on the panics that can affect either individual banks or whole banking systems in the event that they face unexpectedly heavy demands for liquidity. But banks also form part of an interconnected system that creates collective vulnerabilities that differ from those they face individually. The two main forms of these collective vulnerabilities are (a) the risk of a domino-like collapse in which the failure of one bank triggers the failure of many other banks and (b) the risk of asset price spirals. While the risk of a domino-like collapse has been long recognized in the literature, the risk to banks from asset price spirals has been recognized only more recently. It ...