Recessions are almost always accompanied by asset-price declines. But such declines sometimes appear to be the source of adverse surprises, and asset-price busts may subsequently have disproportionately adverse consequences. Falling asset prices create a negative wealth effect and restrain consumption. By making collateral less valuable, they also increase the risk of lending to businesses and thereby worsen the lending terms faced by borrowers.
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.