Liquidity Crisis
Greek banks are losing access to short-term funding and cannot meet withdrawals. What institution provides emergency liquidity?
ECB Emergency Liquidity Assistance
Greece could no longer borrow affordably from financial markets. What policy response provided external funding?
EU/IMF Bailout Program
What happens when many depositors withdraw funds simultaneously due to fear of bank failure?
A bank run.
When financial problems spread from one country to others, what is this called?
Financial contagion.
Why did Greek banks face liquidity shortages even before becoming insolvent?
Depositors withdrew funds and interbank lending froze.
What caused investors to suddenly lose confidence in Greek government debt in 2009?
Revelation that deficits were much larger than reported.
What policy did Greece implement in 2015 to stop massive deposit withdrawals?
Capital controls
Why did Greece’s crisis affect other Eurozone countries like Spain and Italy?
European banks were interconnected and held similar sovereign debt.
What is the primary goal of lender-of-last-resort lending during a crisis?
To provide temporary liquidity and prevent bank collapse.
When government bond yields rise sharply, what happens to borrowing costs?
Borrowing costs increase significantly.
Why are banks especially vulnerable to runs despite being profitable?
They fund long-term assets with short-term deposits.
What role did shared Eurozone membership play in spreading risk?
Countries shared financial markets and currency exposure.
Liquidity support solves liquidity risk but does NOT solve what deeper banking problem?
Solvency risk.
Why did Greek sovereign debt create risk for European banks?
Banks held large amounts of Greek government bonds on their balance sheets.
Deposit insurance systems are primarily designed to prevent what behavior?
Panic withdrawals by depositors.
Investor fear spreading across markets despite different fundamentals is known as what effect?
Market contagion or panic spillover.
Why was ECB liquidity support politically controversial during the Greek crisis?
Because it indirectly financed a highly indebted government and increased moral hazard concerns.
What dangerous feedback loop occurs when weak governments threaten banks holding sovereign debt?
The sovereign–bank doom loop.
Even solvent banks can fail during runs because of what balance sheet mismatch?
Maturity mismatch between assets and liabilities.
Why are financial intermediaries central to systemic risk transmission?
Because interconnected bank balance sheets transmit shocks across countries.