Financial Turbulence and its Concussions on financial performances of banks –paper 1
Introduction
For past the decades, banks have influenced the economics of business and nature of politics in a profound way. It provided innovative financial products and helped in smooth functioning of every economy in functioning and prospering. Earlier, banks use to deal with businesses but now it has taken a wider role in expanding it services to individuals.
The importance of banks arises from their size and their involvement in all areas of the financial activity. Through the years, and still today, banks have been the object of particular concern from many quarters in most of the world, including governments, their publics, and the economic profession (Biagio Bossone, 1999). For some reasons, they have been regarded as a special type of intermediary, one that needs differentiated treatment by the regulatory authorities and even special protective measures from competition and risk of failure.
Banks have faced crises over the years due to various risks. A bank failure generates negative externalities for two reasons. It destroys specific capital and it may lead to further contagion losses in the system (Freixas et al).According to Pitsker (1999) ‘contagion occurs when a shock to one or a group of markets, countries or institutions, spread to other markets, or countries or institutions.’
Claessen et al (2000) points out that contagion can be divided into two categories. The first category deals with spillovers through normal interdependence, which means shocks irrespective of global or local nature which can be transmitted across countries through real and financial linkages. The second category involves with financial crisis which cannot be linked to ch ...