Bank failure

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)
2007-10-09	ABN AMRO	Royal Bank of Scotland Fortis Santander	77.230
2008-02-22	Northern Rock	Government of the United Kingdom	41.213
2008-04-01	Bear Stearns	JPMorgan	2.200
2008-07-01	Countrywide Financial	Bank of America	4.000
2008-07-14	Alliance & Leicester	Santander	1.930
2008-08-31	Dresdner Kleinwort	Commerzbank	10.812
2008-09-07	Fannie Mae and Freddie Mac	Federal Housing Finance Agency	5,000.000
2008-09-14	Merrill Lynch	Bank of America	44.000
2008-09-16	American International Group	United States Treasury	182.000
2008-09-17	Lehman Brothers	Barclays	1.300
2008-09-18	HBOS	Lloyds TSB	33.475
2008-09-26	Lehman Brothers	Nomura Holdings	1.300
2008-09-26	Washington Mutual	JPMorgan	1.900
2008-09-28	Bradford & Bingley	Government of the United Kingdom Santander	1.838
2008-09-28	Fortis	BNP Paribas	12.356
2008-09-29	Abbey National	Government of the United Kingdom Santander	2.298
2008-09-30	Dexia	The Governments of Belgium, France and Luxembourg	7.060
2008-10-03	Wachovia	Wells Fargo	15.000
2008-10-07	Landsbanki	Icelandic Financial Supervisory Authority	4.192
2008-10-08	Glitnir	Icelandic Financial Supervisory Authority	3.254
2008-10-09	Kaupthing Bank	Icelandic Financial Supervisory Authority	1.257
2008-10-13	Lloyds Banking Group	Government of the United Kingdom	26.045
2008-10-13	Royal Bank of Scotland Group	Government of the United Kingdom	30.641
2008-10-14	Bank of America	United States Federal Government	45.000
2008-10-14	Bank of New York Mellon	United States Federal Government	3.000
2008-10-14	Goldman Sachs	United States Federal Government	10.000
2008-10-14	JP Morgan	United States Federal Government	25.000
2008-10-14	Morgan Stanley	United States Federal Government	10.000
2008-10-14	State Street	United States Federal Government	2.000
2008-10-14	Wells Fargo	United States Federal Government	25.000
2008-10-17	UBS	Swiss National Bank	65.314
2008-10-22	ING Group	Government of the Netherlands	11.032
2008-11-23	Citigroup	United States Federal Government	300.000
2009-02-11	Allied Irish Bank	Government of the Republic of Ireland	3.861
2009-02-11	Anglo Irish Bank	Government of the Republic of Ireland	13.570
2009-02-11	Bank of Ireland	Government of the Republic of Ireland	3.861
2012-03-13	Alpha Bank	Government of Greece	2.096
2012-03-13	Eurobank	Government of Greece	4.633
2012-03-13	National Bank of Greece	Government of Greece	7.612
2012-03-13	Piraeus Bank	Government of Greece	5.516
2012-03-25	Laiki Bank	Bank of Cyprus	10.812
2012-05-25	Bankia	Government of Spain	20.962
2012-06-07	Caixa Geral de Depositos	Government of Portugal	1.780
2012-06-07	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

• Bank run
• Causes of the Great Depression
• List of acquired or bankrupt United States banks in the late 2000s financial crisis
• List of bank failures in the United States (2008–present)
• List of largest U.S. bank failures
• Too Big to Fail
• Volcker Rule
• Zombie bank

Footnotes

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

• FDIC's list of failed banks since 2000
• TheStreet.com Interactive bank failure map