d) Based on the account below, explain possible transmission channels of bank failure affecting the real economy.

(6 marks)

Implications on the real economy are to be considered both when assessing the criticality of specific functions performed by the bank and when assessing the financial stability implications in case the bank would fail. The potential impact on real economy should be assessed in conjunction with a number of possible links between the management of a bank crisis and financial stability. For instance, direct or indirect contagion across financial institutions, also through confidence disruptions within the non-financial private sector (notably households and firms), might jeopardize the overall financial stability, which in turn can affect the real economy.

Source: European Systemic Risk Board, Working Paper, Measuring the impact of bank failure on the

real economy 2021.

(Total Marks: 25)