When asset prices fall substantially, lenders may also find themselves holding substantial amounts of nonperforming loans that are backed by what may have become, in some cases, worthless collateral. For this reason, recessions that are preceded by asset-price booms and busts may also be associated with problems in the banking industry.
In such episodes, the ensuing loss of intermediation may serve as an additional force acting to prolong and deepen what might otherwise have been a milder recession. Concerns about the severity of downturns that follow significant asset-price collapses suggest that the identification and analysis of boom-bust asset-price cycles could be useful for policy.