Bank failure

 ( Banking ) 

A bank failure occurs when a bank is unable to meet its obligations to its or other because it has become insolvent or too illiquid to meet its liabilities. Failing banks share commonalities: rising asset losses, deteriorating solvency, and an increasing reliance on expensive noncore funding.

A bank typically fails economically when the market value of its falls below the market value of its liabilities. The insolvent bank either borrows from other solvency 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.

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. 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 solvency 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 bank regulation, and bank failures are of major public policy concern in countries across the world.

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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.

No advance notice is given to the public when a bank fails. 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 Jpmorgan chase bought the assets of Washington Mutual for $1.9 billion. 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. Such policies are designed to discourage that might cause economic damage on a wider scale.

• Bank run
• Causes of the Great Depression
• List of banks acquired or bankrupted in the United States during the 2008 financial crisis
• List of bank failures in the United States (2008–present)
• List of largest bank failures in the United States
• Too big to fail
• Volcker Rule
• Zombie bank

• 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.

• FDIC's list of failed banks since 2000
• TheStreet.com Interactive bank failure map (2009)
• The Story of Indian Bank Failure