Bank failure

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

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.

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

External links