Question

Recessions affect banking sector performance and sometime may lead to banking insolvency. Please explain how recessions affect banking performance and how it may lead to banking insolvency?

Answer 1

Recessions affect the banking performance because banks operate by accepting deposits and giving out loans. The majority of loans are given to producers. Now, in case of a recession, the economic activity slows down. Due to this, the producers are not able to sell their products and their profits go down.

Some producers become unable to repay their loans and hence default on their installments.

Banks are not able to issue fresh loans in case of recessions because investment and consumption both go down.

Due to this, the recssion affects the banking sector and its performance.