Banking Structural Weakness: Dangerous Lending on Over-Valued Assets Dangerous Lending and Over-Valued Assets : continued

Spotting Weakness in Banking Practice

Structural Flaws in Financial Markets

Banking and finance have flaws that arise from time to time:

A safe system is one in which every reasonable test of what might go wrong has an adequate response.

In Capital Flow Analysis, we don't focus on ordinary risks of individual businesses, such as a debtor not being able to pay a loan, unless this risk is so generalized that it could spread and effect prices in an entire market.

Keeping An Eye On Banks

In any event, we won't find structural soft spots in the financial system if we don't look for them.

The first place to look is in the banking system.

The first place to look for trouble is in the banking system.

Bank disclosure is generally poor and banks are a spawning ground for financial crises.

Once you're on to a suspicious practice, you may be able to find comments on the Internet by others who have noticed the same thing.

Common Triggers

In Lesson 20, we talked about the Five Horsemen of the Investment Apocalypse: War, Changing Leadership, New Economic Theory, Technological Change, and Demographics.

Such factors often trigger financial crises and should be considered when examining structural weaknesses you come across.

However, some market crashes may be set off by obscure causes, such as the Crash of 1987 which was related to program trading in derivatives.

Just as important as recognizing structural weaknesses and common triggers to financial crises, is awareness of the blinders that we all wear that prevent us from anticipating such events.

Before proceeding, check your progress:


Which of the following might weaken financial institutions?
Choice 1 Substituting capital by short-term loans.
Choice 3 Increasing collateral on loans.
Choice 2 Increasing loans to boost profits.
Choice 4 Investigating the character of borrowers.
Structural characteristics that may lead to economic collapse include:
Choice 1 Rigid, highly-regulated systems.
Choice 2 Simple, highly-transparent practices.
Choice 3 Over-valued collateral on loans.
Choice 4 Trade deficits between municipalities.
Common triggers of financial crises include:
Choice 2 War.
Choice 1 Higher educational standards.
Choice 3 Changing leadership.
Choice 4 Gradual population increase.

Investment Tutorial: Capital Flow Analysis   Structural Weakness in Banking : continued >

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