THE BANKING system is the heart of a country’s economy. It is the major savings vehicle for the population. It also pumps the money that is required for the economy to grow and for businesses to develop. This intermediation role is especially true for developing countries, as they typically do not have developed capital markets and so bank credit makes up most of the funds that small businesses need to expand. Without such funds, companies cannot develop and jobs can not be created. And yet banking crises are endemic, for it is much easier to lend money than to get it back. And when banks run out of money, they cannot lend, and the broader economy may come to a standstill. This is why the repercussions of banking crises are so severe. The Mexican banking crisis in 1994 and 1995 and the Asian banking crises of 1997 and 1998 tipped those countries into serious recessions that affected the broader community. Today there are many countries that fear banking crises. China, Japan, and Burma are just some of the countries where the banks have large amounts of bad debt.
Once a banking crisis starts, it spreads. If problems in one bank are made public, small depositors get scared and they take their money out of that bank. This causes the bank to fail, which generates bigger headlines and scares even more people, who then withdraw their funds and cause even more banks to fail. Suddenly, you have a massive run on the banks. As a result, governments and bankers fear panics and do their best to keep information secret. This can make it hard for reporters to cover banking. In 1997, the Vietnamese government issued rules requiring journalists to “consult” with the central bank before writing about a number of topics that were on an official list of banking secrets. The list was not made public, but it was thought that the level of nonperforming loans held by the state-run banks was classified as a state secret. Apparently the Communist Party felt that hiding this type of information was essential to safeguard the stability of the banking system.
Banking crises essentially stem from the same problem—large amounts of nonperforming loans. In a healthy banking system, such as that presently found in the United States, “problem loans”—loans that are nonperforming or close to nonperforming—account for about 9 percent of outstanding loans. During the Asian banking crises, the numbers were as high as 47 percent in Thailand and 75 percent in Indonesia.
There are several reasons why banks can end up with bad debt:
State-directed lending to unprofitable government-run businesses, also known as “policy lending.” During the era of state socialism, many countries did not have a private banking sector. In countries such as Russia, China, and Vietnam, banks existed only to finance government activities, and state-owned enterprises and their lending was rarely based on sound financial criteria. Many of these state companies were overstaffed and inefficient and were not required to make a profit. Governments did not subsidize these businesses directly. Instead, they used the banking system to channel funds to these companies. A direct subsidy would have been a more clear way of supporting the businesses and the jobs they created. As it happened, funding companies through the banking system meant that the banks were also put into danger. In many of these countries, there were designated banks that funded different types of industry, farmers, and foreign trade. In the 1990s, governments in many developing countries (for example, Brazil, Morocco, Poland) compelled banks to stop this sectoral lending and phased out regional, specialized development banks altogether. Nonfinancially based lending is but one step away from a second problem: corrupt lending. In Vietnam the small, semiprivate banks lent money to their friends. There was no control over such lending, the friends’ companies did not post collateral, and there were no strict requirements guaranteeing that the money would be paid back. But these problems can also exist in capitalist countries. In the Texas savings and loan scandal of the early 1980s, for instance, federal regulators accused bank directors of making loans to “insiders” in excess of the regulatory limits.
Excessive exposure to sectors experiencing “bubbles.” Some banks have gotten into trouble by excessively lending to particular sectors. Debtors often use the borrowed funds to speculate, causing asset prices to rise to extreme levels that outstrip their “reasonable” value. For their part, banks lend using the assets as collateral. As asset prices “come down to earth,” banks end up having, on their books, overvalued collateral. Real estate is the most common example of a bubble, but throughout history there have many different kinds of bubbles. In the 1990s in the United States, Internet companies experienced a bubble, while in the Nethlerands the “tulipmania” bubble in the seventeenth century caused a dramatic economic downturn when it burst in 1638. Before the Asian crisis of 1997, Thai and Vietnamese banks lent money to companies that built or bought office buildings. Soon there was too much office space, and when the price of the buildings fell the companies were no longer able to repay their loans. During the crisis, a number of Thai banks were hurt by loan defaults, and Bangkok wound up with hundreds of empty office buildings.
Banks have a close relationship to fluctuations in currency. Currency crises can lead to banking crises, and vice versa. Sometimes the two emerge simultaneously, an event referred to as the “twin crisis phenomenon.” If banks in developing countries have dollar-denominated loans and the local currency is devalued, then it becomes more expensive to repay loans that are dollar-denominated and banks’ balance sheets deteriorate. This was a major problem in Korea and Indonesia during the Asian crisis and Turkey in 2001. It was also one of the reasons that Argentina postponed devaluing the peso during the crisis in 2001.
A rise in interest rates also affects banks, for the simple reason that high interest rates make loans more expensive to repay. During the Asian crisis, the IMF encouraged countries to hike up interest rates to support their currencies, which were in freefall. As soon as interest rates went up (reaching above 30 percent in Indonesia) the banks started to fail.
Also, reporters should look out for portfolio mismatches of long-term and short-term debt. If interest rates go up, the bank must begin paying a higher interest rate to its depositors. But its long-term loans cannot be rolled over to a new interest rate. Thus the value of its assets (loans) goes down while the value of its liabilities (deposits) goes up—a recipe for insolvency. This was a major cause of the Texas savings and loan crisis, when the Federal Reserve raised interest rates dramatically to stave off inflation. Savings and loan banks were faced with rapidly rising cost of deposits while heavily invested in home mortgages, which were fixed at a lower interest rate. The high interest rates also caused a recession and loan defaults, eventually amounting to billions in losses for the S&Ls.
Adverse selection. According to economic theory, high interest rates encourage bad borrowing. This sounds strange but it works like this: when interest rates are 5 percent it is not expensive to borrow money. When rates rise to 15 percent, only the companies that are the most desperate will borrow at such a high rate. The strong companies will get money somewhere else. So the companies that borrow at 15 percent are, by definition, the least creditworthy and the most likely to default on loans. The process becomes a vicious cycle. Banks, which cannot differentiate very well between the weak and the strong borrowers (asymmetric information), worry that they will not get paid back, so they raise rates to 20 percent. The companies that borrow at 20 percent are even more desperate and the process continues.
SIDEBAR
Casting around Southeast Asia in the 1990s, one would have been hard pressed to hear warnings of impending doom. The Asian tigers were clocking up the kind of growth that made most rich countries jealous. Economists were speaking of the twenty-first century as the one that would belong to Asia. Foreign investment was pouring into the region.
Even when the dominoes began to fall after the devaluation of the Thai baht on 2 July 1997, economists—in both the public and private sectors—predicted that Indonesia would weather the storm. How wrong they were. In the end, Indonesia was the hardest hit of all of the former Asian Tigers. Its economy, which had grown 5.6 percent in 1997, contracted by a staggering 14 percent in 1998 as the country underwent its worst political and economic upheaval in more than thirty years. Inflation soared to over 80 percent in 1998, and short-term interest rates hit a high of just over 70 percent by September 1998 while the rupiah collapsed.
Long-standing problems in the banking sector played a major role in the havoc wreaked on the Indonesian economy. Corruption, lax banking supervision, perverse links between borrowers and lenders, government interference, and heavy foreign borrowing that was not hedged against the possibility of exchange-rate fluctuation left a mountain of debt after the rupiah plunged. As a result, the ratio of foreign-bank debt to gross domestic product jumped to 140 percent in 1999 from around 35 percent before the crisis, rendering most of the banking system technically bankrupt.
As the economy began to unravel, consumers panicked and rushed to pull money out of the banks. Huge deposit runs put the banks’ capital bases under severe pressure. Bank Indonesia continued to print money rapidly—the base money supply jumped 36 percent in December 1997, 22 percent in January 1998, and a further 11 percent in May 1998—and pumped it into the flailing banking system in the form of liquidity support. It ultimately injected around 144 trillion rupiah into Indonesian banks at the height of the currency crisis.
The economic crisis ultimately caused the local currency to collapse and began a spiral into a political crisis that would eventually pile enough pressure on President Suharto to end his thirty-two-year reign. He stepped down on May 21, after bloody riots in Jakarta that left as many as 1,200 dead.
The key factor driving the collapse of the rupiah, and indeed other currencies in the region, was capital flight. If investors suspect that the government will not or cannot maintain the peg, they often flee the currency, just as they did across Asia in 1997. This capital flight deletes hard-currency reserves and forces the devaluation the investors feared. Analysts reckon up to $40 billion fled Indonesia offshore, some to Singapore, some elsewhere. The rupiah’s slide undermined local confidence in the currency also—many ordinary Indonesians changed their rupiah into dollars and stashed the hard currency under their mattresses.
The currency crisis, in turn, became a banking crisis. Because of the loan-maturity mismatch and the currency mismatch—the use of short-term debt for fixed assets and unhedged external debt—banks and firms were vulnerable to sudden swings in international investors’ confidence. In many ways. even apart from this fundamental problem, the Indonesian banking crisis was inevitable, as local banks were used to funding a number of enterprises that did not make money but were run by friends of President Suharto. The entire economic and legal system was designed to perpetuate this kind of corruption. While Indonesian legislation—in particular the bankruptcy law—has been recognized as respectable by international standards, the problem was always in the implementation. It was routine for judges to be bribed so that cases often never even got to court.
The system began to crumble, and by October 1997, Indonesia became the second Asian tiger to turn, in desperation, to the International Monetary Fund for help. In return for a $43 billion IMF-led package, Indonesia had to agree to reform its legal system, abolish monopolies, improve corporate governance, make the central bank independent, overhaul its banking system, raise interest rates to stabilize the rupiah, privatize businesses, and address a host of other issues.
The package was supposed to help restore confidence in the currency and the government, but it did not work. A major step included in the conditional IMF agreement was the decision to liquidate sixteen banks, some of which were owned by well-connected businessmen and members of Suharto’s family. The IMF’s Asia Pacific director at the time, Hubert Neiss, described the banks as “rotten to the core.” When the banks were closed, however, it sparked a massive rush by depositors who were fearful that their money was not guaranteed. It was, by all accounts, the textbook case of how not to close banks. The situation was only partly remedied in January 1998 by a government guarantee of domestic bank deposits and liabilities and the establishment of the Indonesian Bank Restructuring Agency to rehabilitate the banking system.
The government closed as many as seventy banks and nationalized many others. When the smoke cleared, the total number of banks had declined from 238 before the crisis to 162 in 1999. Looking back, there were glaring warning signals, not least the woefully weak, corrupt, and overcrowded banking system. Moral hazards also played a role, under which the governments effectively offered guarantees to encourage bankers to make loans to borrowers who were incapable of paying them back. And many foreign bankers were encouraged to make highly imprudent loans to overleveraged Indonesian companies.
More than four years after Suharto’s government signed its first agreement with the IMF, Indonesia—now ruled by the democratically elected President Megawati Sukarnoputri—remains a fragile place. Still, foreign banks are investing, and the government exited the IMF program at the end of 2003. But while many banks that survived are doing much better, they rely heavily on interest income from the government bonds issued to refinance them. That means they have not effectively functioned as intermediary institutions helping to stimulate growth.
“Macroeconomic imbalances” are typically associated with loose monetary and fiscal policies. Sometimes governments or central banks decide to loosen the supply of money by, for example, lowering interest rates or increasing government spending. In these cases, consumption increases and economies overheat. Imbalances, such as large current-account deficits and inflation, develop. Banks, in the meantime, also wind up lending a lot of money as well—often without taking sufficient precautions as to the creditworthiness of their clients. In good times, this is not a problem. But eventually, imbalances need to be reversed. The central bank hikes rates and the government tightens its fiscal purse. The economy slows, and, inevitably, the number of non performing loans rises. This was the precisely the dynamic behind the Mexican peso crises in 1994/95.
Weak banking supervision and regulations by central banks. Typically, developing countries lack adequate regulations, and those they have are not consistently enforced. There may be poor credit controls in place, a lack of deposit insurance, and few capital-adequacy requirements. It may be hard for banks to collect collateral, and courts may not support the banks when they try to collect on debts. The role of regulation can de debated, but there is no question that banking crises can be exacerbated by lack of good regulation.
CRISIS PREVENTION
The last century has been marked by frequent banking crises. The Great Depression was in part a result of bank failures in the United States and elsewhere. The 1980s and 1990s saw banks fail in Latin America, and trouble in postcommunist transition economies, as well as the East Asian financial crisis, have brought financial stability to the forefront of global concern. Banking crises, in addition, have been extremely expensive. The cost of recapitalizing a banking sector can easily exceed 10 percent of GDP—a figure that does not even include the “cost” of the inevitable postcrisis recession. As a result, policy makers have developed many safeguards to stop crises from occurring in the first place. Policy makers try to tread a delicate balance with those safeguards. They need to be tight enough to ensure banking sector stability but not too tight so as to restrict banking activity.
Capital-adequacy requirements. The Basel Committee and the Bank for International Settlements (BIS), which designs financial-regulation accords among advanced industrialized nations, have established standards for capital-adequacy requirements. Currently, in every nation that follows the committee’s guidelines, the banks must keep 8 percent of (risk-weighted) assets aside to “provision” against loans that may not be repaid. The Basel rules are currently being revised amid great controversy, and China has refused to go along with the new rules. Capital-adequacy ratios are defined as a measure of a banks’ capital expressed as a percentage of its risk-weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier-one capital, which can absorb losses without a bank being required to cease trading, and tier-two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Liquidity requirements. Banks sometime fail not because they are insolvent but because they, at a particular moment, become illiquid, that is, they do not have enough—usually short-term—funds they can easily get their hands on to honor deposit withdrawals. This (illiquidity) risk is inherent to the business of banking, which revolves around attracting short-term (liquid) deposits and lending them in (illiquid) loans. Bank regulators try to mitigate this risk by requiring banks to maintain, at all times, a certain portion of their deposits in liquid instruments such as cash and very short-term government paper—“dry powder” for “rainy days.”
Open foreign-exchange position limits. During boom periods, demand for loans picks up at a faster pace than deposits. To fill the gap, banks tend to borrow overseas. Banks also do so to benefit from lower international interest rates. This, though, creates a foreign-currency mismatch (also known as an “open fx position”), which renders banks vulnerable to a large movement in the exchange rate. To mitigate this risk, bank regulators often impose a limit on the size of the banks’ open position. Put differently, banks are allowed to borrow abroad (in foreign currency) no more than the amount of their own lending at home in the same currency.
Deposit Insurance. In the wake of bank failures during the Great Depression of the 1930s, the U.S. government created the Federal Deposit Insurance Corporation, in June 1933, an independent federal agency that serves to protect depositors in the event of a crisis, as well as monitor the banks. The FDIC backs deposits as large as $100,000 and derives income from payments by insured banks and interest on government securities. In part, deposit insurance is meant to protect small investors against unexpected banking crises. But it also has a more ambitious objective: Banks fail because of “runs.” The existence of a deposit-insurance scheme makes such runs less frequent and reduces the chance of systemic bank failures.
Many nations around the world have developed deposit-insurance schemes, hoping to protect against bank runs and strengthen their overall financial systems. Some, as in Germany, function privately and with a minimum of government involvement. But there is energetic debate surrounding a “one-size-fits-all” approach to deposit insurance, especially in nations with weak financial infrastructures. Critics claim that deposit insurance pushes down interest rates and thus reduces market discipline. For years the World Bank urged developing countries to put deposit-insurance schemes in place, but now new research from the World Bank suggests that deposit insurance actually raises the risk of banking crises. The research is controversial, but the World Bank is arguing that knowing that the deposits are covered, banks have every incentive to make riskier loans and depositors have very little incentive to be careful about which banks they place their money in. However, many argue that the new stance of the World Bank is wrong, in part because small investors lack information about which banks are likely to have problems and so need to be protected; they certainly are not carelessly putting their savings into troubled banks because they know there is deposit insurance that will cover their accounts.
The worry that deposit insurance contributes to moral hazard has generated new approaches to deposit-insurance design. These approaches focus on encouraging depositors to monitor banks (for example, by restricting the amount of deposits covered and by narrowing the type of deposits covered) while making certain that insured banks lend prudently (for example, by applying higher prudential regulations on insured banks). New schemes have also been experimenting with co-insurance designed to shift the insurance burden toward other creditors (for example, by using subordinated debt—see below).
Subordinated debt. Some argue that banks should be required to sell subordinated debt, a market-based approach that can help keep banks in line. Subordinated debt is high-interest debt that by law cannot be paid back until all other liabilities are satisfied. Investors holding the debt have the most to lose from a default and will thus monitor the banks closely.
Categorizing loans. This requirement increases transparency and helps regulators and depositors better monitor the health of the banking sector. Banks are required to keep strict categories of overdue loans, indicating how long loan payments have been delinquent (that is, 30 days overdue, 60 days, 120 days, and so on). When interest payments are overdue for a significant period of time (this varies country to country), the loan is classified as nonperforming. Banks also are often required to classify even performing loans as “doubtful.” Regulators can use these classifications to identify the stability of individual banks and the banking system as a whole. Regulators are supposed to keep a close eye on the process of classification: Many banks try to hide problem loans. One way banks do so (the so-called evergreening process) is by treating unpaid interest as new lending (that is, “recapitalizing interest”) rather than by declaring the whole loan nonperforming.
Arms-length lending laws. To avoid conflict-of-interest problems, U.S. federal law prohibits banks from lending excessively large amounts of money to officers, directors, principal shareholders, and their related interests. Banks are also subject to limits on how much to lend to particular entities and sectors; these are called “exposure limits.”
Bank–firm relationships. Countries have different traditions regarding how their financial systems operate. Under a market-based system like that in the United States. and the UK, big businesses access capital largely through the markets for stocks and bonds. In Germany and Japan, on the other hand, companies tend to rely on a single, large, “main” or “universal” bank, which lends them money and may even become a large equity shareholder. In this system, the bank plays an active monitoring role and can minimize moral-hazard problems, which is why some argue that the main-bank system is more stable. But others contend that the Anglo-Saxon system, with its reliance on the capital markets, leads to a more efficient allocation of capital and can detect approaching crises with “price signaling.” Price signaling works since capital markets, unlike banks, “mark to market” asset prices (that is, they reprice the asset on a daily basis rather than keeping it on the books at historical price levels). As an asset becomes riskier, its price immediately falls, thus sending investors an instantaneous signal that all is not well.
SOLUTIONS TO BANKING CRISES
Recapitalizing banks. There are many ways to go about patching up the damage of a banking crisis and replenishing dried-up banks with fresh capital. The most common is for the government to take control of failed banks and opt for straight capital injections. The cost of the recapitalization tends to be too high to be financed from current financial sources. Printing money to pay for recapitalization causes inflation. Governments often issue bonds to finance the effort.
Stripping off bad loans. In Malaysia, nonperforming loans were first transferred to an asset-management company and then sold off, leaving the banks healthier. (This is nearly always done in conjunction with recapitalizing the banks. Otherwise, the governent strips the bank of its assets and leaves it only with liabilities).
Sale to foreign banks. Countries that have sold off their ailing banks to foreign competitors usually end up with stronger banking systems. But there can be downsides, too. For instance, foreign banks do not tend to do much local lending. Citibank in Ecuador is more likely to lend to the local branch of IBM or another big U.S. company then to a small local company. Also, if the local bank gets into trouble later, there is no guarantee it will be bailed out by its big foreign parent. A foreign bank could just decide to pull out and take a write-off on their accounts.
Shutting banks down. In countries where there is a lot of corruption this can seem like the best solution. Shutting down a few seriously troubled banks sends a signal that the government is serious about reform and lets depositors know they have nothing to be afraid of. If the worst banks are not closed, it is likely they will go back to their old habits and get into trouble again. However, shutting down banks can cause panic and thus send the opposite signal. Depositors start to look around and worry that other banks are in trouble and rush to pull out their money before they get shut down as well. In Indonesia, the IMF pressured the government to shut down sixteen financial institutions in November 1998, and by the end of the month nearly two-thirds of all Indonesian banks suffered a run on deposits.
When reporters evaluate different options for resolving a banking crisis, they should ask detailed questions about the actual situation in the country:
Are local businesses highly dependent on bank finance? Would a credit crunch be a disaster for them? Are there alternate forms of finance for local firms?
What is the public mood like? Would bank closures create a panic?
Does the government have persuasive advisors? Do the economists from the IMF and the World Bank who are dealing with the country really seem familiar with the banking sector? Are they making a big effort to familiarize themselves with the domestic situation, or are they holed up in the central bank crunching numbers? Are they being lied to by local officials?
Are steps really being taken so the crisis does not happen again, or is it likely the scenario will be repeated in a few years?
TIPS FOR REPORTERS
What is the level of nonperforming loans in the banking system and banks of the country in question? What is considered a healthy level? If this information is kept secret, reporters should try to figure out how NPLs are defined and how lax or tight the credit controls are. Do the banks have any overdue loans, and how generous is the definition of overdue? In the Vietnam crisis, for instance, interest on a loan had to be a year overdue before the principal was considered to be at risk. Thus, official pronouncements about there being few “bad loans” in the Vietnamese banking sector were hardly credible. Though by the government’s definition everything was okay, their loan classification did not meet international norms. By international standards it was clear there was a high level of NPLs in the system.
The executives at the top of the banks are not likely to speak frankly about their banks, so reporters need to go far down the chain of command. Managers and credit officers at the local branches are a good start. They should be asked how they feel about their loan portfolios, whether they look solid, whether the government-run companies are good at paying back their loans. Many countries now have local credit-rating agencies that monitor bank balance sheets. Finally, international institutions (especially the World Bank and the IMF) put out periodic reports on the health of the banking sector in various countries.
Reporters should write from the other side of the problem. If the banks will not talk, the companies that borrow from the banks should be examined to get a sense of how strong they are and whether they are in a position to repay their bank loans. If the country has a bank that specializes in lending to agricultural businesses, it is important to visit it and see how profitable it is.
Reporters should find out what sort of collateral has been pledged and look at how easy it is to collect. If the collateral is real estate and the country has a real estate bubble, then chances are the banks will have a problem. If the court systems in the country are slow and inefficient (or corrupt), it may be unlikely that a bank will be able to collect and resell the collateral.
Reporters should have a local accountant or banker to go over a profit-and-loss account and a balance sheet and explain what to look for. Tell-tale signs include major write-downs and off-balance-sheet exposures.
In the event of a devaluation, reporters should pay attention to what percentage of loans and deposits are held in foreign currencies. Also important is the currency mismatch from the borrower’s perspective: for example, if a large share of loans is in foreign currency but the borrower’s revenues tend to be in local currency, then a devaluation could well cause corporate failures and, in turn, banking problems.
Reporters need to monitor interest rates. If interest rates go up, loans are more difficult to repay, and there may be defaults. Also, it is important to know which banks have long-term loans with fixed rates, like mortgages. Because bank deposits are short term, this may lead to serious balance sheet problems.
LINKS FOR MORE INFORMATION
8. The Institute of International Banking and Finance, based at the SMU School of Law, maintains a Web site that provides access to research papers on banking issues around the world. http://iibf.law.smu.edu/index.htm.
9. The Institute of International Finance, a global association of financial institutions created in 1983 in response to the international debt crisis, publishes numerous reports on regulatory and policy issues concerning banks around the world. http://www.iif.com/pub/index.quagga.
10. Global Banking Law Database, maintained by the World Bank and the International Monetary Fund. http://www.gbld.org.
GLOSSARY
NONPERFORMING LOAN (NPL) A loan on which a borrower has not made a payment for an extended period of time.
CAPITAL ADEQUACY RATIO A measure of the amount of a bank’s capital expressed as a percentage of its risk-weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier-one capital, which can absorb losses without a bank’s being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
MORAL HAZARD A phenomenon encountered whenever there is a disjunction between “actions” and “consequences.” In a perfect market, an investor should be penalized for making a bad decision, just as he or she is rewarded for a good one. In “failed markets,” this causality breaks. Economists ascribe failing markets to myriad causes including, in particular, incomplete information, that is, when two parties engaging in an economic transaction do not share the same information set.
LIQUIDITY A concept that assesses the speed and ease with which an asset’s value can be realized. Cash is by far the most liquid asset: one can use it to buy virtually anything, and its “value” (in terms of purchasing power) is well defined. Checking accounts are slightly less liquid than cash but more so than term-deposits, which can be accessed only at the end of a particular period. At the other end of the liquidity spectrum lie assets such as fine art, jewelry, and real estate. Bonds and stocks are somewhere in the middle. Banks, almost by definition, face liquidity mismatches since their assets are tied up in long-term investments (e.g., loans) but their sources of financing (e.g., deposits) can be easily called. This mismatch can create crises if depositors decide to withdraw their deposits in a rush. Regulators try to limit this risk by requiring banks to hold a minimum amount of liquid assets.