Bank failure

Depositors "run" on a failing New York City bank in an effort to recover their money, July 1914

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. 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.

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 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.

Notable acquisitions of failed banks

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	National Westminster Bank Plc	Royal Bank of Scotland	42.5
2003-10-27	FleetBoston Financial	Bank of America	47
2004-01-15	Bank One Corporation	JPMorgan Chase	58
2006-01-01	MBNA	Bank of America	34.2
2007-05-20	Capitalia	UniCredit	29.47
2007-09-28	NetBank	ING Group	0.014
2007-10-09	ABN AMRO	Royal Bank of Scotland Fortis Santander	77.23	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	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	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. As of 1933, each account owner is insured up to $250,000 in the event of a bank failure. 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.

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 JP Morgan 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 bank runs that might cause economic damage on a wider scale.

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

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.

See also

• Bank run
• Causes of the Great Depression
• List of banks acquired or bankrupted in the United States during the 2007–2008 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

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). ISBN 978-0-521-66346-5.
• 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.

External links

• FDIC's list of failed banks since 2000
• TheStreet.com Interactive bank failure map (2009)
• The Story of Indian Bank Failure Archived August 19, 2022, at the Wayback Machine