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] 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. A bank may be taken over by the regulating government agency if its shareholders' equity 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 notable bank acquisitions
Announcement date Target Acquirer Transaction value
(US$ billion)
1999-11-29[4] National Westminster Bank Plc Royal Bank of Scotland 42.5
2003-10-27[5] FleetBoston Financial Bank of America 47
2004-01-15[6] Bank One Corporation JPMorgan Chase 58
2006-01-01[7] MBNA Bank of America 34.2
2007-05-20[8] Capitalia UniCredit 29.47
2007-09-28[9] NetBank ING Group 0.014
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 2.2
2008-07-01 Countrywide Financial Bank of America 4
2008-07-14 Alliance & Leicester Santander 1.93
2008-08-31 Dresdner Kleinwort Commerzbank 10.812
2008-09-07 Fannie Mae and Freddie Mac Federal Housing Finance Agency 5,000
2008-09-14 Merrill Lynch Bank of America 44
2008-09-16 American International Group United States Treasury 182
2008-09-17 Lehman Brothers Barclays 1.3
2008-09-18 HBOS Lloyds TSB 33.475
2008-09-26 Lehman Brothers Nomura Holdings 1.3
2008-09-26 Washington Mutual JPMorgan 1.9
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 7.06
2008-10-03 Wachovia Wells Fargo 15
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
2008-10-14 Bank of New York Mellon United States Federal Government 3
2008-10-14 Goldman Sachs United States Federal Government 10
2008-10-14 JP Morgan United States Federal Government 25
2008-10-14 Morgan Stanley United States Federal Government 10
2008-10-14 State Street United States Federal Government 2
2008-10-14 Wells Fargo United States Federal Government 25
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
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 13.57
2009-02-11 Bank of Ireland Government of the Republic of Ireland 3.861
2009-03-19[10] IndyMac OneWest Bank unknown
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 1.78
2012-06-07 Millennium BCP Government of Portugal 3.3


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.[11] 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 has been tracked and published by the FDIC since 1934, and has decreased after a peak in 2010 due to the financial crisis of 2007–2008.[12]

No advance notice is given to the public when a bank fails.[1] 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.[13] 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.[14] Such policies are designed to discourage bank runs that might cause economic damage on a wider scale.

Global failure

The failure of a bank is relevant not only to the country in which it is headquartered, but for all other nations with which it conducts business. This dynamic was highlighted during the financial crisis of 2007–2008, when the failures of major bulge bracket investment banks affected local economies globally. 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. A 2015 analysis by the Bank of England found greater interconnectedness between banks has led to a greater transmission of stresses during a time of recession.[15]

See also

References
  1. "When a Bank Fails - Facts for Depositors, Creditors, and Borrowers". Federal Deposit Insurance Corporation.
  2. Brewer III, Elijah; Genay, Hesna; Hunter, William Curt; Kaufman, George G. (August 26, 2002). "The Value of Banking Relationships During a Financial Crisis: Evidence from Failures of Japanese Banks" (PDF). Federal Reserve Bank of Chicago. Archived (PDF) from the original on 2016-12-25. Retrieved 2021-05-14.
  3. "Bank Failures, Systemic Risk, and Bank Regulation" (PDF). The Cato Institute. Spring 1996. Archived from the original on 8 December 2008.
  4. "RBS launches $43B bid for NatWest - Nov. 29, 1999". money.cnn.com. Retrieved 2021-05-14.
  5. "Bank of America to acquire FleetBoston for $47B - Oct. 27, 2003". CNN. October 27, 2003.
  6. "J.P. Morgan to buy Bank One for $58 billion - Jan. 15, 2004". CNN. January 15, 2004.
  7. "Bank Of America Acquires MBNA". CBS News. Associated Press. January 1, 2006.
  8. Biondi, Paolo; Sisto, Alberto (2007-05-20). "UniCredit agrees to buy Capitalia in $29 bln deal". Reuters. Retrieved 2021-05-14.
  9. Wilchins, Dan (2007-09-28). "ING Bank to acquire NetBank deposits". Reuters. Retrieved 2021-05-14.
  10. "OneWest completes acquisition of Indymac Assets". Reuters. 2009-03-20. Retrieved 2021-05-14.
  11. "Deposit Insurance FAQs". Federal Deposit Insurance Corporation.
  12. "FDIC | Failed Bank List". Federal Deposit Insurance Corporation.
  13. Ellis, David; Sahadi, Jeanne (September 26, 2008). "JPMorgan buys WaMu". CNN.
  14. "OTS 08-046 - Washington Mutual Acquired by JPMorgan Chase". Office of Thrift Supervision. September 25, 2008. Archived from the original on 15 January 2009.
  15. Zijun, Liu; Quiet, Stephanie; Roth, Benedict (2015). "Banking sector interconnectedness: what is it, how can we measure it and why does it matter?" (PDF). Bank of England. Archived (PDF) from the original on 2021-10-05.

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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