As a case in point, if more retail merchants in Germany accepted debit or credit card payments, that would undoubtedly drive down the share of cash in higher payment amounts – though I admit that this does bring to mind the question “What came first: the chicken or the egg?”.
Adverse shocks can then set in motion a downward spiral of asset valuations and prices that ultimately threatens the solvency of financial institutions. The destabilising effects of debt arise from its contractual features. Standard debt contracts are insensitive to the borrower’s situation. An adjustment to idiosyncratic shocks can occur only through new lending or through haircuts on existing loans after risks have materialised.