When equity and property prices collapse (bust), bank balance sheets are impaired because:

Question

Quizplus · Accepted Answer

When equity and property prices collapse, the value of the collateral that is backing many of the loans banks have made also decrease. This leads to impairment of bank balance sheets as the collateral is worth less than the loans made against it. Choice A and D are incorrect as banks holding corporate stocks or owning property outright may have an impact on their balance sheet, but it is not necessarily a direct result of a collapse in equity and property prices.

When Equity and Property Prices Collapse (Bust), Bank Balance Sheets