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] Failing banks share commonalities: rising asset losses, deteriorating solvency, and an increasing reliance on expensive noncore funding.^[2]

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.^[3] 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.^[4]

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:

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.^[14] 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 2008 financial crisis.^[15]

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.^[16]

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.^[17] 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.^[18] Such policies are designed to discourage bank runs that might cause economic damage on a wider scale.^{[citation needed]}

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 2008 financial crisis, 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.^[19]

See also

• 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

References

1. ^ "When a Bank Fails – Facts for Depositors, Creditors, and Borrowers". Federal Deposit Insurance Corporation
2. ^ Correia, Sergio; Luck, Stephan; Verner, Emil (2025). "Failing Banks". The Quarterly Journal of Economics. arXiv:2506.06082. doi:10.1093/qje/qjaf044. ISSN 0033-5533
3. ^ 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". Federal Reserve Bank of Chicago. Archived 2016-12-25 at the Wayback Machine. Retrieved 2021-05-14.
4. ^ "Bank Failures, Systemic Risk, and Bank Regulation". The Cato Institute. Spring 1996. Archived December 8, 2008 at the Wayback Machine.
5. ^ "RBS launches $43B bid for NatWest – Nov. 29, 1999". money.cnn.com. Archived from the original on June 19, 2002. Retrieved 2021-05-14.
6. ^ "Bank of America to acquire FleetBoston for $47B – Oct. 27, 2003". CNN. October 27, 2003. Archived from the original on October 28, 2003.
7. ^ "J.P. Morgan to buy Bank One for $58 billion – Jan. 15, 2004". CNN. January 15, 2004. Archived from the original on February 2, 2004.
8. ^ "Bank Of America Acquires MBNA". CBS News. Associated Press. January 1, 2006.
9. ^ Biondi, Paolo & Sisto, Alberto (May 20, 2007). "UniCredit agrees to buy Capitalia in $29 bln deal". Reuters. Retrieved 2021-05-14.
10. ^ Wilchins, Dan (September 28, 2007). "ING Bank to acquire NetBank deposits". Reuters. Retrieved 2021-05-14.
11. ^ Schwartz, Nelson D. (2008-10-03). "Dutch government nationalizes Fortis' operations in the Netherlands". The New York Times. ISSN 0362-4331. Retrieved 2025-07-23.
12. ^ "Het einde voor ABN Amro als staatsbank is in zicht" (in Dutch). RTL.nl. 2015-05-22. Retrieved 2025-07-23.
13. ^ "OneWest completes acquisition of Indymac Assets". Reuters. March 20, 2009. Retrieved 2021-05-14.
14. ^ "Deposit Insurance FAQs". Federal Deposit Insurance Corporation
15. ^ "FDIC | Failed Bank List". Federal Deposit Insurance Corporation
16. ^ Laycock, Richard (May 11, 2023). "List of bank failures: 2000 to 2023 | Finder". finder.com. Retrieved 2023-05-12.
17. ^ Ellis, David & Sahadi, Jeanne (September 26, 2008). "JPMorgan buys WaMu". CNN. Archived from the original on September 29, 2008.
18. ^ "OTS 08-046 – Washington Mutual Acquired by JPMorgan Chase". Office of Thrift Supervision. September 25, 2008. Archived January 15, 2009 at the Wayback Machine.
19. ^ Zijun, Liu; Quiet, Stephanie; Roth, Benedict (2015). "Banking sector interconnectedness: what is it, how can we measure it and why does it matter?". Bank of England. Archived 2021-10-05 at the Wayback Machine.

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