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Message Subject THE ECONOMY & YOU # (Daily Updated Videos & Articles)
Poster Handle RoXY
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The Next Banking Crisis
by Hugo Radice

In the ongoing Euro-crisis, our political leaders are constantly criticized for ‘playing catch-up’ and not being ‘ahead of the curve’ (although others might feel that they are completely round the bend). Perhaps, therefore, it is time to look up from the turmoil in the sovereign bond markets and the counsels of the European Union, dust off the crystal ball, and look forward to the next banking crisis. For it is becoming increasingly clear that banks across Europe face a much more serious problem than a 50 percent haircut on their holdings of Greek government bonds; and that problem goes to the heart of what is wrong with the current culture and practices of the financial sector.

A bank draws its income from three main sources: shareholders, depositors and lenders. The shareholders provide the risk capital, as in any capitalist business. Depositors seeking a safe and convenient place to store their money traditionally provide the bulk of the funds which the bank then lends to its clients, while holding a modest proportion in reserve to meet any possible withdrawals by depositors. And lenders provide additional funds by buying marketable securities issued by the bank in the form of bonds.

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