If this occurs, banks' capital will decrease further due to resolution of the losses incurred through the failures of the firms the banks lent to. This will lead to a further tightening in banks' lending attitudes and bring about further failures and deterioration in economic conditions.
Thus, tighter lending attitudes resulting from decreases in capital lead to a deterioration in economic conditions, and this in turn brings about a further deterioration in economic  BIS Review 94/2009  5  conditions through further decreases in capital and tightening in lending attitudes. This vicious circle is the phenomenon described by the phrase "adverse feedback loop operating between financial and economic activity."