- Credit risk — Financial stability
This chapter considers the link between issues of risk and capital. It argues that although all commercial enterprises take risks, the activities of banks and other financial services enterprises give rise to special considerations because they may attract funds from individuals who have either no appetite for risk or a much more conservative attitude to risk. Moreover, the interconnection between financial institutions in the wholesale financial markets also means that if one institution gets into financial difficulty there is a serious risk, as the recent global financial crisis has shown, that the problem may spread rapidly to other financial institutions and cause serious financial instability, damaging economic activity across the board. Indeed, the evolution of the ‘credit crunch’ into the financial crisis, triggering the global economic recession that began in 2008, appeared to follow exactly this pattern.
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