The Understanding of Worldwide Banking Crisis and Bank Failures

Financial Crisis/ Banking Crisis or Banking failures are part of every state who have an economic sector. The Economic goals that have followed by every federal government are adequacy of food production and distribution, reduction of birth rate, modernization, transfer of technology, erosion control and economic nationalism etc.

But still, the financial risks are increasing day by day and can not overcome the risks for the economics department. Bank failure and Banking crisis are two different terms of financial sector distress. Banking crises are brought the bank or the group of banks towards failures. The World Bank describes in an article ‘Banking crisis’ that “failures of one bank or a group of bank extends to other banks in the organism”[1]. Banking crises can be damaged or collapse the whole system of banking and shake the economic sector. Banking crises emerged as cicadas that unexpected arise from the Earth. As cicadas damage the corps or tree; same like the banking crisis ruin all the economy by restricting the credits and causing costly liquidation (Laeven, 2011)[2]. Other scholars (Hutchison & McDill, 1999 ) describes that banking crises or financial crises are because of several reasons such as; disruption in credit channels, economic contraction, the hardship of making effective economic policies, bankruptcies, nationalism, and forced mergers[3]. There are other several reasons involved behind these crises like asset charges, economic happenings, domestic level origin or even external aspects too. Laeven (2011) while reviewing banking crises in a research article ‘Banking Crises: A Review’ that it preceded by credit booms and assets price bubbles (an unstainable, form of prices changes or cash monitors) and it followed by the governments to run the financial systems[4]. The biggest factor of the crisis in the sector of finance is that bureaucrats, politicians or businessmen not paying tax, it’s indicated as most of the prominent factor behind fiascos of the bank.

Hutchison & McDill (1999) mentioned the International Monetary Fund (IMF) report of 1998, the financial or banking risks are associated with; Unsustainable macroeconomic policies, Weak financial structures, Global business conditions, Exchange rate misalignments and last but not least political instability[5].

Banking crises have increased in recent years, and it leads the pathway to bank failures, Bank failures describe at ‘BD Dictionary’ as, “Situations where financial sectors are becoming bankrupt or incapable to meet the credit obligations. This often happens when organizations are overleveraged themselves and no longer maintain a stable flow of cash. But if banks are FDIC insured then your deposits are assured by the federal government”[6]

Pritchard (2018) mentioned that bank failures have started when banks are no longer be able to meet their responsibilities and lose investments, or unable to provide the proper costumer's services such as cash, depositor demands or difficulties[7].

The History of Bank crises or closure was begun in 1970 and unfortunately, continues in third world countries. In an article, the author mentioned that from 1970 to 2011, there are 147 systemic banking crises, while 218 currency crises (The World Bank Report)[8].

Anderson (2000) highlighted some events in an article, which includes; LatAm sovereign debt crisis – 1982, Savings and loans crisis – 1980, Stock market crash – 1987, Junk bond crash – 1989, Tequila crisis – 1994, Asia crisis – 1997 to 1998, Dotcom bubble – 1999 to 2000 and Global financial crisis – 2007 to 2008. The author further says, “One of the things that are clear in all of the crises is that strong leadership is crucial.[9]”

There are many incidents of Banking crises that brought the system of banks to failures, as the most famous one is ‘The Great Depression 1929-1932[10]’ when banks fall and cause of failures is:

1. The stock market collided in the United States of America

2. Bank runs

3. Missed or overdue loan expenditures

Bank disasters or their closure is the chain processed among the banks, which presented as (Banking failure and closures cycle)[11]

Bank Runs -->More Panics -->More Failure

The above cycle describes that when Stock Market has been crashed the system gets unstable, people have started panicking and run towards the bank for their money withdrawal but the banks are not in a position to pay, so banks are forced to fail and close down.

The Crises and Failures lead the nation to a downfall of the state’s economy, it affects every sector of the state and even the common people. Who is affected by the Bank’s failure and all its crises? Obviously, everyone[12]. The major impact of the banking crisis or their fiasco is on savers, business and consumers, it affects the economic growth of the state and lead failure on the pathway towards unemployment (Pettinger, 2017)[13].

The economic crisis or the system failure collapsed the nations, they faced several issues or problems such as; the rich people get richer while poor people get poorer, bubbles the prices, disturbed the petrol prices, the unemployment rate increased, law and enforcement get fail to handle the situations, and government fail to govern etc. The government need to search for solutions or remedies to overcome the economic crisis to run smoothly in every sector of the state. The traditional banking system and the Investing banking system both need to look forward towards the remedies for a banking crisis or bank’s failure, to not repeat the same mistakes which were the root of the previous crisis. Tekelov (2012) cited in an article that IMF supported the ‘Full- reserve banking’ because it can end the recession, reduce the personal and national debt, reduce inequality and ensure that banks can be allowed to fail with no cost to the taxpayer [14].

References:

1 The World Bank, ‘Banking crisis’. Retrieved from: http://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/banking-crisis

2 Laeven, Luc. (2011). Banking Crises: A Review, The Annual Review of Financial Economics, online at financial.annualreviews.org. Retrieved from: https://www.annualreviews.org/doi/pdf/10.1146/annurev-financial-102710-144816

3 Hutchison, Michael & McDill, Kathleen. (1999). Are All Banking Crises Alike? Department of Economics Social Sciences, University of California, Working Paper Series Vol.99-11. Retrieved from: http://www.agi.or.jp/workingpapers/WP1999-11.pdf

4 Laeven, Luc. (2011). Banking Crises: A Review, The Annual Review of Financial Economics, online at financial.annualreviews.org. Retrieved from: https://www.annualreviews.org/doi/pdf/10.1146/annurev-financial-102710-144816

5 Hutchison, Michael & McDill, Kathleen. (1999). Are All Banking Crises Alike? Department of Economics

Social Sciences, University of California, Working Paper Series Vol.99-11. Retrieved from: http://www.agi.or.jp/workingpapers/WP1999-11.pdf

6 BD Dictionary, Bank Failure. Retrieved from: http://www.businessdictionary.com/definition/bank-failure.html

7 Pritchard, Justin. (2018). Bank Failure & What Happens to Your Money, thebalance.com. Retrieved from: https://www.thebalance.com/bank-failures-315791

8 The World Bank, ‘Banking crisis’. Retrieved from: http://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/banking-crisis

9 Anderson, Spencer. (2000). A history of the past 40 years in financial crises, IFR International Financing Review. Retrieved from: http://www.ifre.com/a-history-of-the-past-40-years-in-financial-crises/21102949.fullarticle

10 Pettinger, Tejvan. (2017). Impact of a banking crisis, Economics help. Retrieved from: https://www.economicshelp.org/blog/16958/economics/impact-of-a-banking-crisis/

11 Banking Crisis of the 1930s. (2015). Daniel Rumsey. Retrieved from: https://www.youtube.com/watch?v=7bNE7riEFOA

12 The Causes and Effects of the Financial Crisis 2008. (2012). Vivien Yeow. Retrieved from: https://www.youtube.com/watch?v=N9YLta5Tr2A

13 Pettinger, Tejvan. (2017). Impact of a Banking Crisis, Economics help. Retrieved from: https://www.economicshelp.org/blog/16958/economics/impact-of-a-banking-crisis/

14 Tekelova, Mira. (2012). Solution To The Financial Crisis: Full Reserve Banking, Positive Money. Retrieved from: https://positivemoney.org/2012/08/full-reserve-banking-solution-to-the-financial-crisis/