Bank failure

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  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.

Ofer Abarbanel – Executive Profile

Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library