In a balance sheet recession, chartered bank choices for prudence over profits do not add up to smart choices for the economy as a whole.

Question

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In a balance sheet recession, households and businesses focus on reducing their debt levels, so they cut back on spending. In such a situation, banks may choose to prioritize prudence over profits, such as by tightening lending standards or hoarding reserves. However, these actions can exacerbate the recession by reducing the availability of credit and further depressing spending. Thus, what may be prudent choices for individual banks can become harmful for the economy as a whole.

In a Balance Sheet Recession, Chartered Bank Choices for Prudence