A sharp, unexpected surge in default rates on unsecured consumer loans (such as credit cards and personal loans) could trigger a systemic solvency crisis in the retail banking sector.
This outcome is most likely to occur if, following the increase in defaults, major commercial banks:
maintain a high proportion of liquid assets, such as reserves held at the central bank.
have a low ratio of capital to their total assets, leaving them with thin equity buffers.
rely predominantly on stable, long-term retail deposits rather than volatile wholesale funding.
are subject to strict ring-fencing regulations that separate retail banking from investment banking.
176 exam-style questions on AQA A Level Economics 2.4 Financial markets and monetary policy (A-level only), covering 2.4.1 The structure of financial markets and financial assets, 2.4.2 Commercial banks and investment banks, 2.4.3 Central banks and monetary policy, and 2.4.4 The regulation of the financial system. Each one has a worked solution and a mark scheme showing where the marks go.