The term financial crisis is commonly used to describe an economical decline. Many financial crises are associated with banking panics, stock market crashes (e.g. Black Friday, in 1929) or currency crises. Also it might be caused by bursting financial bubbles. I believe that the last factor is a common reason of financial crisis in Lithuania in 2008.
It is noticeable that in 2008 interest rate of taking a loan was extremely low. To put it more clearly, many Lithuanian banks, such as SEB, DNB, Swedbank, Snoras, Medicine bank, Šiaulių bank, Ūkio bank, were offering to take housing loans with a very low interest rate. This leads to the idea that many people were taking loans irresponsibly without being sure that they can acctually return it. Regarding to the data of Lithuania‘s Central bank at the beggining of 2008, general amount of given loans by commercial banks‘ was higher then in 2007. Portfolio of given loans rised even 47.5 % .Therefore, it would appear that this kind of situation caused “loans bubble”, which was one of the reasons why 2008 crisis in Lithuania began.
Another significant reason is that interest rate of a deposit was also not in a usual level. It was higher than in past years. It is more noticeable by analyzing a current situation. For instance, in Snoras (The biggest commercial bank, founded in Lithuania in that period of time, also operating in all three Baltic states) percentage of putting money in a deposit reached even 9.5% per year (in comparison: it consists 0% in this year). It was made a bubble to attract people. After this, habitants started to put money in deposits, but the bank could not pay for it. As a result of this, in 2011 100% of the bank shares were nationalized by the Lithuanian government and the bank was declared bankrupt. It is also true that many people lost their money, which has also contributed to the result that financial crisis in Lithuanian banks started. It was made a bubble to attract people.
Similar situations were also noticeable in other European commercial banks. For example, a commercial bank located in United Kingdom, named Northern Rock, also went bankrupt during the crisis of 2008. The reason of that was that Northern Rock let to lend the loans, which were approved without any regard for the fact that the bank did not have the money to lend. This kind of bubble was also one of the reasons why crisis in United Kingdom started.
On the other hand, there are also plenty of other reasons regarding to the causes of crisis. For instance, currency crises. Inflation can also cause crises in banks. For example, ruble degradation in Russia caused many problems to another countries banks. As well as this, it created a panic among inhabitants. Many people immediately started to buy things until the currency did not reach the lower level of value. Furthermore, stock market crashes. As stock prices falls immediately it causes many bankrupts of small depositors and it has a huge impact to the whole industry.
To sum everything which was said up, there are a huge amount of reasons why bank crises starts. Although, in my opinion, one of the main reasons why financial crises in banks started was bursting financial bubbles.
1. Statistical data of Lithuanians banks interest rates. Interact: www.theglobaleconomy.com
2. Rimantas Rudzkis (2007) The bubble of loans. Interact: http://m.alfa.lt/straipsnis/141884/paskolu-bumas-tesis-atotrukis-tarp-euro-ir-lito-palukanu-mazes
3. Robert W. Vivian (2010) The failure of Northern Rock: Evidence of a money/banking crisis. Interact: http://www.fanews.co.za/article/fanews-fanuus-magazine-archives/60/prof-robert-vivian/1315/the-failure-of-northerm-rock-evidence-of-a-money-banking-crisis/10175
4. Erika Fuks (2014) Russian ruble crisis: are we comming to bancrupt? Interact: http://m.delfi.lt/verslas/verslas/article.php?id=66700274