Impact of Financial Crises on the U.S. Banking Industry: Challenges and Counter Strategies

Abstract

Financial crises are repeatedly creating waves in modern economic history that have generated massive disruptions in financial markets and real economy. Crises are typically triggered by structural misalignments, high levels of leverage and regulatory failures that trigger credit crunches, losses in investor confidence and system instability. The U.S. banking industry plays a pivotal role in financial intermediation and is one of the most vulnerable sectors. The performance of banks has significant implications for the overall stability of the economy. Keeping these in view, this paper examines the impact of financial crises on the U.S. banking industry and suggests possible strategies to improve resilience. The paper examines impact of crises on financial system as whole, internal development of banks and consumers’ access as well as confidence in banks before suggesting three broad sets of counter strategies. The findings of this paper suggest that financial crises impact the banking industry by crunching credit, losses in asset quality, impact on profitability and massive losses in consumers’ confidence towards banking institutions. To mitigate these impacts, this paper suggests three broad sets of strategies that include improving regulatory oversight and risk management, encouraging innovation in banking services and improving consumers’ protection along with financial education. The findings of this paper are theoretical as well as practical. The findings of this paper contribute to the literature on systemic financial risk, it adds to the academic discourse and provides valuable insights for policy makers, regulators and industry practitioners who are interested in shaping a resilient and more trusted banking industry.