1. Failure of Banks

2. Risks Associated with Banking Business Large deposit base is a liability for the banks. Credit created by banks lead to a liability that is much higher than the cash holdings of the banks. Non performing assets of banks create burden on the banks. Creating risky products for its clients increases bank’s liabilities.

3. Bank Failures YearBank / MarketCauses 1970US PennMarket liquidity 1973US Secondary BankingCredit bank failures following trading losses 1974Franklin NationalPoor Credit Control 1974Bankhaus Herstatt GermanyForex overtrading credit / payments system 1980sJohnson Matthey UKPoor credit controls 1982LDC Debt crisisBank failures following loan losses 1983Penn Square USA Industry concentration, excessive revenue generation 1984RumasaIntergroup lending, nepotism 1984Continental IllinoisIndustry concentration, poor credit controls 1985Canadian Regional BanksLoan losses 1986FRN MarketCollapse of market liquidity and issuance 1986US ThriftsLoan losses 1987Stock market crashPrice volatility after shift in expectations 1989Collapse of US Junk bondsCollapse of market liquidity and issuance Source: BIS, www.bis.org

4. Bank Failures Source: BIS, www.bis.org

5. Bank Failures YearBank / MarketCauses 1995BaringsPoor management controls 1995Mexican crisisPrice volatility and shift in expectations 1997Asian crisisPrice volatility and shift in expectations, bank failures following loan losses – market, credit, sovereign. 1998RussianCollapse of market liquidity and issuance 1998LTCMCollapse of market liquidity and issuance 2001Allied Irish Banks (USA) Rogue trader Source: BIS, www.bis.org

6. YearBank / MarketCauses 2008Washington mutual bank Poor credit control 2008Bank united Poor credit control 2008Colonian bank Poor credit control 2008Guaranty bank Real estate concentration 2008United Commercial bank Poor credit control 2008Amtrust bank Price volatility 2009Bank United FSB Poor credit control 2010Western Bank Puerto Rico Poor credit control Source: BIS www.bis.org Bank Failures

7. Causes of Bank Failures Poor asset quality (98% of cases) Poor management (90% of cases) Weak economic environment (35% of cases) Fraud (11% of cases) Source: BIS, www.bis.org

8. Asset Quality Credit losses Connected lending Inherited portfolios Commodity shocks Excessive overhead Interest rate mismatch Foreign exchange mismatch Excessive diversification Fraud Flawed liberalization policies

9. Warning signals in Predicting Bank Failures Excessive loan / asset growth Excessive lending concentration Deteriorating financial ratios Loan recoveries to gross loan charge-offs Deposit rates higher than market rates Off-balance sheet liabilities Creative accounting Delayed financials Change in auditors Change in management

10. Warning signals in Predicting Bank Failures Use of political influence Rumours in money market Share price volatility Deteriorating economy

11. Bank Support Mechanisms UK Model Funded by large clearing banks by the Bank of England Initial liquidity support for viable banks Improving failed bank’s liquidity Bank of England taking over a failed bank and subsequently privatizing (losses borne by the central bank)

12. Bank Support Mechanisms US Model Federal Savings and Loans Insurance Corporation (before 1989) Acquisition or Mergers Income maintenance programme Accounting prudence Bridge banks Management support

13. Bank Support Mechanisms US Model Resolution Trust Corporation (RTC) (After 1989) Concentration of failed assets with RTC Liquidation or sale of banks to private sector Losses borne by RTC (funded by federal guarantee)

14. Bank Support Mechanisms Spanish Model Bank “hospital” and carve-out mechanism Accordion principle Joint funding by commercial banks and the Bank of Spain Deposit guarantee fund buys bad assets Provides banks with guarantee and long-term soft loans Sale of banks to private sector Nationalization of failed bank

15. Bank Support Mechanisms Chile Model Central bank issues bonds to buy bad assets, with buyback schedule Central bank loans to banks converted into equity Sale of banks to private sector