Bank failure

A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities.[1] More specifically, a bank usually fails economically when the market value of its assets declines to a value that is less than the market value of its liabilities. The insolvent bank either borrows from other solvent banks or sells its assets at a lower price than its market value to generate liquid money to pay its depositors on demand. The inability of the solvent banks to lend liquid money to the insolvent bank creates a bank panic among the depositors as more depositors try to take out cash deposits from the bank. As such, the bank is unable to fulfill the demands of all of its depositors on time. Also, a bank may be taken over by the regulating government agency if Shareholders Equity (i.e. capital ratios) are below the regulatory minimum.

Depositors "run" on a failing New York City bank in an effort to recover their money, July 1914

The failure of a bank is generally considered to be of more importance than the failure of other types of business firms because of the interconnectedness and fragility of banking institutions. Research has shown that the market value of customers of the failed banks is adversely affected at the date of the failure announcements.[2] It is often feared that the spill over effects of a failure of one bank can quickly spread throughout the economy and possibly result in the failure of other banks, whether or not those banks were solvent at the time as the marginal depositors try to take out cash deposits from these banks to avoid from suffering losses. Thereby, the spill over effect of bank panic or systemic risk has a multiplier effect on all banks and financial institutions leading to a greater effect of bank failure in the economy. As a result, banking institutions are typically subjected to rigorous regulation, and bank failures are of major public policy concern in countries across the world.[3]

List of international bank acquisitions
Announcement date Target Acquirer Transaction Value
US$ billion)
9-10-2007 ABN AMRO Royal Bank of Scotland Fortis Santander 77.230
22-2-2008 Northern Rock Government of the United Kingdom 41.213
1-4-2008 Bear Stearns JPMorgan 2.200
1-7-2008 Countrywide Financial Bank of America 4.000
14-7-2008 Alliance & Leicester Santander 1.930
31-8-2008 Dresdner Kleinwort Commerzbank 10.812
7-9-2008 Fannie Mae and Freddie Mac Federal Housing Finance Agency 5,000.000
14-9-2008 Merrill Lynch Bank of America 44.000
16-9-2008 American International Group United States Treasury 182.000
17-9-2008 Lehman Brothers Barclays 1.300
18-9-2008 HBOS Lloyds TSB 33.475
26-9-2008 Lehman Brothers Nomura Holdings 1.300
26-9-2008 Washington Mutual JPMorgan 1.900
28-9-2008 Bradford & Bingley Government of the United Kingdom Santander 1.838
28-9-2008 Fortis BNP Paribas 12.356
29-9-2008 Abbey National Government of the United Kingdom Santander 2.298
30-9-2008 Dexia The Governments of Belgium, France and Luxembourg 7.060
3-10-2008 Wachovia Wells Fargo 15.000
7-10-2008 Landsbanki Icelandic Financial Supervisory Authority 4.192
8-10-2008 Glitnir Icelandic Financial Supervisory Authority 3.254
9-10-2008 Kaupthing Bank Icelandic Financial Supervisory Authority 1.257
13-10-2008 Lloyds Banking Group Government of the United Kingdom 26.045
13-10-2008 Royal Bank of Scotland Group Government of the United Kingdom 30.641
14-10-2008 Bank of America United States Federal Government 45.000
14-10-2008 Bank of New York Mellon United States Federal Government 3.000
14-10-2008 Goldman Sachs United States Federal Government 10.000
14-10-2008 JP Morgan United States Federal Government 25.000
14-10-2008 Morgan Stanley United States Federal Government 10.000
14-10-2008 State Street United States Federal Government 2.000
14-10-2008 Wells Fargo United States Federal Government 25.000
17-10-2008 UBS Swiss National Bank 65.314
22-10-2008 ING Group Government of the Netherlands 11.032
23-11-2008 Citigroup United States Federal Government 300.000
11-2-2009 Allied Irish Bank Government of the Republic of Ireland 3.861
11-2-2009 Anglo Irish Bank Government of the Republic of Ireland 13.570
11-2-2009 Bank of Ireland Government of the Republic of Ireland 3.861
13-3-2012 Alpha Bank Government of Greece 2.096
13-3-2012 Eurobank Government of Greece 4.633
13-3-2012 National Bank of Greece Government of Greece 7.612
13-3-2012 Piraeus Bank Government of Greece 5.516
25-3-2012 Laiki Bank Bank of Cyprus 10.812
25-5-2012 Bankia Government of Spain 20.962
7-6-2012 Caixa Geral de Depositos Government of Portugal 1.780
7-6-2012 Millennium BCP Government of Portugal 3.300

Bank failures in the U.S.

In the U.S., deposits in savings and checking accounts are backed by the FDIC. Currently, each account owner is insured up to $250,000 in the event of a bank failure.[4] When a bank fails, in addition to insuring the deposits, the FDIC acts as the receiver of the failed bank, taking control of the bank's assets and deciding how to settle its debts. The number of bank failures is tracked and published by the FDIC since 1934 and has decreased after a peak in 2010 due to the financial crisis of 2007–08.[5]

No advance notice is given to the public when a bank fails.[6] Under ideal circumstances, a bank failure can occur without customers losing access to their funds at any point. For example, in the 2008 failure of Washington Mutual the FDIC was able to broker a deal in which JP Morgan Chase bought the assets of Washington Mutual for $1.9 billion.[7] Existing customers were immediately turned into JP Morgan Chase customers, without disruption in their ability to use their ATM cards or do banking at branches.[8] Such policies are designed to discourage bank runs that might cause economic damage on a wider scale.

Global failure

As aforementioned, the failure of a bank is relevant not only to the country in which it is headquartered, but for all other nations that it conducts business with. This dynamic was highlighted quite dramatically in the 2008 financial crisis, during which the failures of major bulge bracket investment banks held dire consequences for local economies throughout the broader global market. The high degree to which markets are integrated in the global economy made this a near inevitability. This interconnectedness was manifested not on a high level, with respect to deals negotiated between major companies from different parts of the world, but also to the global nature of any one company's makeup. Outsourcing is a key example of this makeup. As major banks such as Lehman Brothers and Bear Stearns failed, the employees from countries other than the United States suffered in turn.

See also

Footnotes
  1. "When a Bank Fails - Facts for Depositors, Creditors, and Borrowers". FDIC. 2008-10-03. Retrieved 2008-12-21.
  2. Federal Reserve Bank of Chicago, The Value of Banking Relationships During a Financial Crisis, December 2002
  3. "Bank Failures, Systemic Risk, and Bank Regulation". The Cato Institute. Spring 1996. Archived from the original on 8 December 2008. Retrieved 2008-12-21.
  4. "Changes in FDIC Deposit Insurance Coverage". FDIC. Archived from the original on 22 November 2010. Retrieved 30 December 2010.
  5. http://www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30 Archived 2011-07-07 at the Wayback Machine. Accessed 7-4-2013.
  6. "When a Bank Fails". FDIC. Fall 2008. Archived from the original on 24 February 2009. Retrieved 2009-02-06.
  7. "JPMorgan Chase to Buy Washington Mutual". Business Week. September 26, 2008. Archived from the original on 3 March 2009. Retrieved 2009-02-06.
  8. "OTS 08-046 - Washington Mutual Acquired by JPMorgan Chase". Office of Thrift Supervision. September 25, 2008. Archived from the original on 15 January 2009. Retrieved 2009-02-06.

Further reading
  • Calomiris, Charles W., and Joseph R. Mason. "Fundamentals, panics, and bank distress during the depression." American Economic Review (2003): 1615-1647. online
  • Carlson, Mark. "Causes of bank suspensions in the panic of 1893." Explorations in Economic History 42.1 (2005): 56-80. online
  • Wicker, Elmus. The banking panics of the Great Depression (2000).
  • Wicker, Elmus. Banking panics of the gilded age (2006).
  • Wicker, Elmus. "A Reconsideration of the Causes of the Banking Panic of 1930." Journal of Economic History 40.03 (1980): 571-583.
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