Question

Discuss the factor of banking crises from the view point of financial capital and liquidity

Answer 1

The issue related to the financial capital and liquidity can have the causal effects on the banking services and banking crisis can take place. A liquidity problem takes place when there is a mismanagement between assets and liabilities. A higher proportion of short term liability and higher proportion of long term assets, create the cash crunch problem. It will create liquidity problem and bank will not be able to honor the demand of money made by the depositors. It creates banking crisis and investors become anxious about the banking system. A misuse of financial capital in disbursement of loans has the scope of creation of poor quality assets. These poor quality assets can become bad if not repaid on time. It will create NPA and higher volume of the NPA will create banking crisis. So, liquidity and financial capital have scope to make an impact upon the investor’s confidence and create banking crisis.