Answer to Question #240998 in Management for patricia connor

Question

1. Explain how an adverse economic climate would impact a bank's balance sheet. Discuss with reference to Caribbean examples.
   

Answer 1

In times of adverse economic climate it is hard to maintain financial stability , banks generally provide loans to individuals and other non-traditional counterparties. These loans offer banks and other financial intermediaries with much-needed liquidity while also increasing reserve levels. In the Caribbean, for example, this rise was required to meet increased demand, as banks sought to keep more liquid assets to protect themselves against shocks. However, in many cases, the actions to support financial stability resulted in a huge increase in the number of reserves, considerably beyond the increased need by banks.