Bank failure may not be limited to banks, International Economics

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Q. "Bank failure may not be limited to banks that have mismanaged their assets." Explain why.

Answer: A sound bank countenanced with the wholesale loss of deposits is likely to close its door even if the asset side of its balance sheet is basically sound because many bank assets are illiquid and cannot be sold quickly to meet deposit obligations without substantial loss to the bank. Students must stress the atmosphere of financial panic which will lead to self- fulfilling expectations.

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