If a bank's capital decreases as a result of it incurring a large amount of losses due to a decline in stock prices or a failure of a firm it has lent to, the total amount of risk the bank can take will decrease accordingly. In this case, the bank will become more cautious than before in extending loans that are accompanied by risk.
From the standpoint of firms, loans will become less available. Should this lead to a reduction in business operations at a large number of firms, overall economic conditions will deteriorate in consequence. Some of these firms may go bankrupt due to a deterioration in their business conditions.