Final answer:
Stand-by credit disadvantages include potential restriction of bank lending due to asset value declines and the asset-liability time mismatch that can lead to financial instability within banks, affecting the whole economy.
Step-by-step explanation:
The disadvantages of stand-by credit for financing purposes can be significant, particularly in times of financial stress for banks. When banks experience a decline in the value of their assets, they may restrict lending, which can harm sectors reliant on borrowed money, such as business investment, home construction, and car manufacturing. The 2008-2009 Great Recession is an example of how reduced loan availability can have a substantial negative impact on the economy.
Additionally, banks face the risk of high levels of loan defaults. This risk is exacerbated by an asset-liability time mismatch, as banks' liabilities (customer deposits) can be withdrawn in the short term, while assets (like loans and bonds) are repaid over longer periods.
Prevailing interest rate changes can further complicate this situation, putting banks in vulnerable positions if they cannot adjust interest rates paid to depositors in line with the rates they collect on existing loans.