Bank Failure
Bank failure occurs when a bank is unable to meet its financial obligations, leading to insolvency and closure. This can result from a range of factors, including poor management, economic downturns, or excessive risk-taking. The consequences of bank failure can be far-reaching, impacting depositors, borrowers, and the broader financial system.
5 Key excerpts on "Bank Failure"
eBook - ePubFinancial Stability and Central Banks
A Global Perspective
- Richard Brearley, Juliette Healey, Peter J N Sinclair, Charles Goodhart, David T. Llewellyn, Chang Shu, Richard Brearley, Juliette Healey, Peter J N Sinclair, Charles Goodhart, David T. Llewellyn, Chang Shu(Authors)
- 2001(Publication Date)
- Routledge(Publisher)
...Yet large amounts of government aid are provided to rescue banks in financial distress and banks are subject to considerable regulatory oversight to limit the likelihood that such government assistance will be called upon. Thus, falls in asset values are regarded as having wider and more serious consequences if they occur in the banking system rather than elsewhere in the economy. It is these additional costs, rather than the amount of the loan losses, that both constitute the costs to society of a banking crisis and justify regulation. The role of bank regulation is to correct a market failure, which may either arise because the insolvency of a bank involves social costs that are ignored by a value-maximising bank management or because agents are subject to a co-ordination problem. 10 There are three commonly suggested ways that this market failure could come about. The first arises from banks’ central role in operating the payment system. The second stems from the way that a banking crisis may restrict credit and accentuate a fall in economic activity. The third potential for market failure comes from the fragility of bank deposits and the costs of monitoring bank solvency. On the first issue—the operation of the payment system—there appears little to be said. If a serious loss of confidence in the banking system were to lead to a large net loss of deposits and a flight to cash, the consequent disruption to the payment system would severely damage trade. Such dangers, however, are most likely to be associated with war or acute domestic unrest rather than with simply a weak regulatory system. The second way that a banking crisis may affect economic activity is if it results in credit restrictions. 11 A negative shock reduces bank profits and therefore its equity capital. If this leads it to reduce lending, the economic shock may be accentuated. Of course, the bank could raise additional equity to maintain its lending...
eBook - ePub- Irene Finel-Honigman, Fernando Sotelino(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...4 Bank Failures and systemic crises Introduction The basic function of banking is to serve as provider of credit for a community or nation based on trust in its institutions. Bank Failures are the most virulent manifestations of loss of trust and credit worthiness. The Latin derivation of bank is banca, the moneychanger’s bench. Bankruptcy was the breaking or “rupta” of the bench once the contract between lender and borrower was no longer honored. When King Edward III of England sought financing for the Hundred Years War, this included financing from his Italian bankers in Florence. However, in 1348 when he could no longer honor his obligations and repay his large loans to Florentine banking houses, he instigated the first international Bank Failures. From 1551 to 1866, financial crises occurred approximately every ten years. American economist Hyman Minsky theorized that since the Renaissance, financial crises were often the effect of displacements, wars or revolutions, which provoked monetary instability, currency reduction through devaluation or excessive appreciation followed by depreciation which could trigger sovereign debt crises. “The incidence of banking crises proves to be remarkably similar in the high- and middle-to-low-income countries. Indeed, the tally of crises is particularly high for the world’s financial centers: France, the United Kingdom, and the United States” (Reinhart and Rogoff, 2009: 141). From a societal perspective, bank crises and systemic failures bring in their wake erosion of trust in the financial system, its transactions, agents, and instruments. The repercussions of banking crises can invariably lead to sharp declines in tax revenues and higher deficits...
eBook - ePubThe Bank Credit Analysis Handbook
A Guide for Analysts, Bankers and Investors
- Jonathan Golin, Philippe Delhaise(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...In contrast, nonfinancial firms, with a few exceptions, are lightly regulated in most jurisdictions, and governments generally take a hands-off policy toward their activities. In most contemporary market-driven economies, if an ordinary company fails, it is of no great concern. This is not so in the case of banks. Because they depend on depositor confidence for their survival, and since governments neither want to confront irate depositors, nor more critically, contend with a significant number of banks unable to function as payment and credit conduits, deposit-taking institutions are rarely left to fend for themselves and go bust without a passing thought. Even where deposit insurance exists and depositors remain pacified, the failure of a single critical financial institution may be plausibly viewed by policymakers as likely to have a detrimental impact on the health of the regional or national financial system. Moreover, the costs of repairing a banking crisis typically far outweigh the costs of taking prudent measures to prevent one. Governments therefore actively monitor, regulate, and—in light of the importance of banks to their respective economies—ultimately function as lenders of last resort through the national central bank, or an equivalent agency. Owing to the privileged position that banks commonly enjoy, their credit analysis must give due consideration to an institution’s role within the relevant financial system. Its position will affect the analyst’s assessment concerning the probability, and degree, of support that may be offered by the state—whether explicitly or more commonly implicitly—in the case the bank experiences financial distress. Making such assessments not only calls for consideration of applicable laws and regulations, but also relevant institutional structures and policies, both historic and prospective...
eBook - ePubRetail and Digital Banking
Principles and Practice
- John Henderson(Author)
- 2018(Publication Date)
- Kogan Page(Publisher)
...Should a bank overstate the value of their mortgage book, for example, and there was a sharp reduction in the property values, then this could lead to a perilous situation where the advances they have provided exceed the value of the property that is owned. This is a classic situation of negative capital or insolvency. Insolvency Occurs when a person or company has an inability to meet their financial obligations when they are due. Some crises may be isolated to an individual bank which may result in a run on the bank (as highlighted in the Overend Gurney Case Study in Chapter 1). As you will remember, this is when a single institution gets into difficulties and depositors and investors desperately attempt to withdraw their funds, leaving the bank in a position where it has insufficient cash or liquidity to fund its immediate loan repayments. Unless the cause of the Bank Failure can be attributed and isolated to a unique and specific set of circumstances, such as the internal fraud that led to losses of £827m, ending Barings Bank in February 1995, or the internal corruption that led to the demise of Bank of Credit and Commerce International in July 1991, then invariably broader environmental conditions may well lead to further runs on multiple banks, wider panic and systemic crises. Systemic Refers to the knock-on effects of an event that impact upon the interconnected parts of the financial system and beyond into other aspects of society. Should a bank suffer the indignity of a run happening to them, this will inevitably lead to an imbalance between being able to hand all on-demand depositors’ balances back to them and having the ability to meet short-term obligations to settle outstanding loan repayments that it is due to make...
eBook - ePubAbsent Management in Banking
How Banks Fail and Cause Financial Crisis
- Christian Dinesen(Author)
- 2020(Publication Date)
- Palgrave Macmillan(Publisher)
...In a buoyant economy, many employees of a failed bank should be able to find other employment. In the case of single Bank Failure, the failed bank is often taken over by another bank, such as was the case when Barings was taken over by ING in 1995. In such a case, only few employees may lose their jobs. In a situation where more than one bank fails, and particularly if the economy is negatively affected by numerous Bank Failures, finding new employment can be extremely difficult. Banks use a wide range of suppliers, from paper to information technology to professional services, such as for example auditors. A Bank Failure means reduced income for the bank’s suppliers. More than one Bank Failure can be serious, particularly for suppliers heavily dependent on not just one bank but also on the banking sector. Bank owners often lose everything when a bank fails. ING paid £1 for Barings, a bank that had once been the second largest in London. The Baring family was the majority owner at the time of the bank’s failure and lost their investment. For banks listed on the stock exchange, a failed bank causes loss to shareholders. This loss will range from what the shares can be sold at to a possible acquirer to a total loss if the shares have no value. While Lehman Brothers’ shares were worth nothing on 17 September 2008, Merrill Lynch was sold to Bank of America for $29 per share. Had Bank of America decided to buy Lehman Brothers instead of Merrill Lynch, the loss to the respective shareholders would have been different, if not perhaps completely opposite, depending on what Bank of America might have paid for Lehman Brothers. AIG’s shares were widely held by pensioners who lost part of their pensions when AIG’s market capitalisation of $140 billion in 2007 fell to almost nil. Some customers are also owners of their banks. When mutual or savings banks demutualise, the issued shares are generally distributed to depositors and other customers...
