Banking Laws& Practice

Topic

Reasons For Bank Failure

Table Of Contents

• Introduction• Why Do Banks Fail ?• The Remedial Measures• Related Case Studies• Conclusion• References

Lets Begin

Introduction

Bank failures are not common, nor limited to a few countries.

The cost of bank failure can be high which can even cause instability in the fi nancial system.

The instability which in turn’s aff ects the nati on’s growth rate.

Bank failures are more commonly observed in those countries that have deregulated or liberalized their fi nancial market, they are not uncommon where banks have made bad loans and carried a high proporti on of non-performing loans .

Why do Banks Fail

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.

Reasons:

Bad loans:

Funding issues:

Asset/liability mismatch:

Regulatory issues.

Proprietary trading.

Non-bank activities.

Risk management decisions.

Inappropriate loans to bank insiders.

Rogue employees.

Runs on banks.

Case Studies

In Pakistan

The MEHRAN BANK scandal also known as Mehrangate, was a major political scandal in the history of Pakistan between 1990-1994 in which senior politicians and political parties were found guilty . Younus Habib admitted that he took 1.4 billion rupees from the Bank and distributed 200 million among different politicians. The rest of the money went to different organizations and bank accounts.

In United Kingdom

In July 1991, the Bank of Credit and Commerce International (BCCI) , one of the 300 or so branches and subsidiaries of foreign banks operating in London, failed because of widespread fraud. BCCI had branches in over 70 countries with the UK offices being branches of the Luxembourg subsidiary. Its principal shareholders were in Abu Dhabi.

In United States

The US economy has faced many economic fluctuations in different regions. The famous recessions of 1929-1930, 1980-1990, 1999-2001, and 2008-2009 are very well known in the US economy. Since the country faced recession, it also had faced a large number of bank failures in the economy. We have a graphical representation on the number of banks failed due to financial crisis in US economy.

1998 2000 2002 2004 2006 2008 2010 2012 2014 20160

20

40

60

80

100

120

140

160

180

Banks Failure analysis in US economy

no of banks failed

In Spain

During the past three decades, there have been a number of episodes of bank failures in Spain. First, a banking crisis of considerable proportions spread during the period 1978-1983. Subsequently, the first half of the 1990s saw the failure of some very small banks and eventually, in 1993, of Banesto, at that time the fourth largest Spanish bank by volume of deposits.

The Remedial Measures

P r o p e r l e n d i n g a n d b o r r o w i n g o p e r a ti o n s .

B a n k i n g o b l i g a ti o n s a n d b u s i n e s s o f b a n k s s h o u l d b e p r o p e r l y d e fi n e d i n e v e r y c o u n t r y.

R e d u c ti o n i n t h e f r a u d u l e n t r e g a r d i n g b a n k i n g o p e r a ti o n s .

P r o p e r i n s p e c ti o n s o n t h e b a n k i n g s y s t e m s a s w e l l t o m a k e i m p r o v e m e n t .

I n s p e c ti o n s o n t h e l i a b i l i ti e s .

P r o p e r s y s t e m o f r e c r u i t m e n t f o r t h e b a n k i n g s y s t e m s .

Banking sector requires the following steps to reduce the chances of failure:

In our analysis what we have made so far, we can say that failure is not that thing which grows in a day . It is a series of jolts that brings the point of disaster . For example, Spain, Norway, Sweden and the U.S. had very similar experiences when they liberalized their financial systems. In addition, in countries where there were a significant number of failures, real estate lending played a major role. The failure of large individual banks is likely to be much more distinguishing. The Barings and BCCI failures both had significant fraud.

Conclusion