Wikipedia

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 typically fails economically when the market value of its assets falls below 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]

Notable acquisitions of failed banks

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The following table lists significant acquisitions of failed banks, illustrating the scale and impact of major bank failures. It does not include partial purchases by governments to prevent bank or banking system failures, such as government intervention during the subprime mortgage crisis:

Announcement date _target Acquirer Transaction value
(US$ billion) 		Type
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 77.23[dubious – discuss] Breakup, nationalization of some components with return to publicly traded company
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[dubious – discuss] Federal conservatorship with expected return to independent management
2008-09-14   Merrill Lynch   Bank of America 44
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 UK assets seized by UK government; bad assets nationalized by Iceland and retail operations reorganized as Landsbankinn
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
2008-10-22   ING Group   Government of the Netherlands 11.032
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.

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In the U.S., deposits in savings and checking accounts are backed by the FDIC. As of 1933, 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]

Since the year 2000, over 500 banks have failed. The 2010s saw the most bank failures in recent memory, with 367 banks collapsing over that decade. However, while the 2010s saw the most banks fail, it wasn't the worst decade in terms of the value of the banks going under. The 2000s saw 192 banks go under with $533 billion in assets ($749 billion in 2023 dollars) compared to the $273 billion ($354 billion) lost in the 2010s.[13]

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.[14] 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.[15] Such policies are designed to discourage bank runs that might cause economic damage on a wider scale.[citation needed]

Further information: List of largest U.S. bank failures

Global failure

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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.[16]

See also

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References

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  1. ^ a b "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 December 25, 2016. Retrieved May 14, 2021.
  3. ^ "Bank Failures, Systemic Risk, and Bank Regulation" (PDF). The Cato Institute. Spring 1996. Archived from the original on December 8, 2008.
  4. ^ "RBS launches $43B bid for NatWest – Nov. 29, 1999". money.cnn.com. Retrieved May 14, 2021.
  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 (May 20, 2007). "UniCredit agrees to buy Capitalia in $29 bln deal". Reuters. Retrieved May 14, 2021.
  9. ^ Wilchins, Dan (September 28, 2007). "ING Bank to acquire NetBank deposits". Reuters. Retrieved May 14, 2021.
  10. ^ "OneWest completes acquisition of Indymac Assets". Reuters. March 20, 2009. Retrieved May 14, 2021.
  11. ^ "Deposit Insurance FAQs". Federal Deposit Insurance Corporation.
  12. ^ "FDIC | Failed Bank List". Federal Deposit Insurance Corporation.
  13. ^ Laycock, Richard (May 11, 2023). "List of bank failures: 2000 to 2023 | Finder". finder.com. Retrieved May 12, 2023.
  14. ^ Ellis, David; Sahadi, Jeanne (September 26, 2008). "JPMorgan buys WaMu". CNN.
  15. ^ "OTS 08-046 – Washington Mutual Acquired by JPMorgan Chase". Office of Thrift Supervision. September 25, 2008. Archived from the original on January 15, 2009.
  16. ^ 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 October 5, 2021.

Further reading

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  • 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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