Bank failures and rescues: Difference between revisions
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===The vulnerability of banks=== | ===The vulnerability of banks=== | ||
The fact that banks often lend as much as twenty times the value of their share capital makes their continued solvency sensitive to defaults on those loans. "Retail banks", that obtain funds from depositors, are also vulnerable to the risk that fears of ''insolvency'' can result in "bank ''runs''". They are also vulnerable to the "''contagion''" that can occur when depositor "''herding''" converts the news of a run on one of their number into a run on others. Before the adoption by ''central banks'' as "''lenders of last resort''", herding and contagion were believed to have led to the failure of many otherwise solvent banks. "Wholesale" or "investment" banks, that obtain their funds by borrowing on the "''money markets''" and the "''interbank markets''", can also suffer from contagion resulting from herding by market operators. | |||
A study of the 1932 Chicago banking crisis indicated that riskiness of assets distinguished failed banks from survivors, suggesting an absence of contagion. <ref>[http://www.nber.org/papers/w4934 Charles . Calomiris and Joseph Mason: , ''Contagion and Bank Failures During the Great Depression: The June 1932 Chicago Banking Panic'', NBER Working Paper No. 4934 November 1994]</ref> | A study of the 1932 Chicago banking crisis indicated that riskiness of assets distinguished failed banks from survivors, suggesting an absence of contagion. <ref>[http://www.nber.org/papers/w4934 Charles . Calomiris and Joseph Mason: , ''Contagion and Bank Failures During the Great Depression: The June 1932 Chicago Banking Panic'', NBER Working Paper No. 4934 November 1994]</ref> | ||
Revision as of 11:14, 20 October 2008
Many of the numerous bank failures that have occurred over the years have not proved harmful to their national economies. Governments have found it necessary, however, to guard against the danger of "systemic failure" resulting from a general loss of confidence in the banking system and have, from time to time, rescued a failing bank in order to avert that danger. There have nevertheless been several instances of banking crises that have done serious damage to national economies.
- For definitions of the terms shown in italics in this article, see the glossary.
- For a detailed list of failures and rescues in their historical sequence, see the timelines subpage.
Background
The vulnerability of banks
The fact that banks often lend as much as twenty times the value of their share capital makes their continued solvency sensitive to defaults on those loans. "Retail banks", that obtain funds from depositors, are also vulnerable to the risk that fears of insolvency can result in "bank runs". They are also vulnerable to the "contagion" that can occur when depositor "herding" converts the news of a run on one of their number into a run on others. Before the adoption by central banks as "lenders of last resort", herding and contagion were believed to have led to the failure of many otherwise solvent banks. "Wholesale" or "investment" banks, that obtain their funds by borrowing on the "money markets" and the "interbank markets", can also suffer from contagion resulting from herding by market operators.
A study of the 1932 Chicago banking crisis indicated that riskiness of assets distinguished failed banks from survivors, suggesting an absence of contagion. [1]
The case for rescues
lender of the last resort [2]
The inter-war years
The United States
In the immediate post-war years there was a rapid growth in the number of United States banks, and there were relatively few failures. In 1921, however, there was a surge in the number of bank failures, especially in farming areas, and the number of banks started to decline. In 1930, a massive further increase in failures occurred in response to the Great Recession, and failures continued at a high level until the "banking holiday" of 1933. The introduction in that year of the Federal Deposit Insurance scheme restored investors' confidence, and there were few failures during the remainder of the inter-war period.