Spring Break
Recession's reach quite complicated
Jordan Grummer
Issue date: 4/29/09 Section: News
This also allowed a bank in a different state to insure deposits at a completely unrelated bank in another state. This made sense because they could diversify their portfolio and capital could flow to where it was needed, Reyes said.
The main problem with banks taking stakes in other states is that it leaves them open to a bigger risk for systemic crisis, said Reyes. That occurs when the failure of one system, in this case a bank, affects a broad range of other banks.
When the financial sector fails, the rest of the economy suffers, Raja Kali, associate professor of economics, said.
"Because the financial sector is essential to the economy, when they experience unemployment, it willa affect firms and individuals," Kali said.
Reyes broke down what can happen when banks become intertwined.
"For example, banks in Arkansas could be invested in California. When California mortgages stop being paid, it affects [the bank in Arkansas] and the [cash] it has to do its own day-to-day operations," Reyes said. "They can't satisfy their own clients' needs because of a mortgage investment they have in another state."
"People stop borrowing, and people stop consuming, and people stop paying sales taxes, which generates unemployment by itself," Reyes said. "So people lose their job and their income, which generates less tax revenue for the state."
The crisis was able to jump borders because of this, Reyes said.
The main problem with banks taking stakes in other states is that it leaves them open to a bigger risk for systemic crisis, said Reyes. That occurs when the failure of one system, in this case a bank, affects a broad range of other banks.
When the financial sector fails, the rest of the economy suffers, Raja Kali, associate professor of economics, said.
"Because the financial sector is essential to the economy, when they experience unemployment, it willa affect firms and individuals," Kali said.
Reyes broke down what can happen when banks become intertwined.
"For example, banks in Arkansas could be invested in California. When California mortgages stop being paid, it affects [the bank in Arkansas] and the [cash] it has to do its own day-to-day operations," Reyes said. "They can't satisfy their own clients' needs because of a mortgage investment they have in another state."
"People stop borrowing, and people stop consuming, and people stop paying sales taxes, which generates unemployment by itself," Reyes said. "So people lose their job and their income, which generates less tax revenue for the state."
The crisis was able to jump borders because of this, Reyes said.
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