The Office of the Comptroller of the Currency (OCC) study was conducted in entirely different banking and economic conditions compared to the 1960’s.
Between 1979 and 1987, almost 700 banks had failed, and by 1988 banks still were failing at a very high rate. The study showed that while poor economic conditions make it more difficult for a bank to make a profit, the policies and procedures of the banks management and the board of directors had the greatest impact on whether a bank will succeed or fail. In other words, poor management and other internal problems can been seen as one of the main reasons for failure.Economic decline contributed to the difficulties of many of the failed and problem banks. It was a significant cause of the problems in more than one-third of the banks that were evaluated. However, the economic factors weren’t the sole cause of a bank failure. “All but 7 percent of the failed and problem banks also had significant internal problems related to management. “8 The FDIC examined the causes of the 34 insured bank failures occurring between 1997 through 2002 to try isolate contributing factors.
These factors fell into four categories, which were fraud, poor management, poor internal controls, and economic conditions.The results of the review are summarised in Table 4, which ranks the 1997-2002 failures according to size. 9 It shows that 97% of bank failures was due to poor management, 82% due to poor controls and 71% to fraud. Only 3% were due to economic conditions. Some examples of American bank failures are The First National Bank of Keystone grew from a total asset base of $17 million in 1977 to total assets of $1. 1 billion in 1999. 10 It failed due to rapid expansion and competition pressure.
Nextbank, grew from a start-up asset base of $300 million in 1999 to total assets of $900 million in 2001.It failed due to a lack of direction from the bank’s board of directors and management. There is also The First Pennsylvania Bank and The First National Bank of Chicago. A mere decade ago Japan’s financial system, and especially its banking system, was not only the largest but also the strongest in the world.
Nine of the worlds top ten banks in asset size were Japanese, the Big Four Japanese securities companies were the world’s largest. This was because banks had ample, low cost, deposit funds and the highest credit ratings.They did 34 percent of the world’s international lending business, more than banks in any other country. Today is a completely different picture. Japan’s financial system is weak and in trouble. Banks are no longer ranked among the world’s top ten, and their credit ratings have declined dramatically. External problems were low inflation, appreciating currency, balanced government budget, and large external surpluses.
However, Japan followed a clear international boom and bust pattern in terms of real output growth, credit growth and stock price movements.Japan’s current banking difficulties, have been around since the early 1990’s. There were four main causes which have caused bank to fail. They were failure to create a prudential regulatory system, the creation and then bursting of the stock and real estate market bubbles, globalisation, and the high rate of financial innovation. While Japanese banks have a number of problems, the fundamental problem is that the banking system has a huge amount of “actual and potential non-performing loans relative to its capitalisation and bad loan reserves. “12 Also this problem has become worse throughout the 1990s.
These bad loans range from loans to companies that have gone bankrupt and non-performing loans in which interest and principal payments are unpaid. In fall 1997 the Ministry of Finance shocked the world with its estimate of the bad and troubled loan problem at a figure of i?? 76. 7 trillion, triple previous estimates.
The bad loans and their write-offs are directly related to a bank’s capital, which has direct pressure for it to fail. “The 21 Big Banks between 1992 and 1998 wrote off i?? 42. 02 trillion, most (68. 5 percent) in the last three years and i?? 12.14 trillion (28. 9 percent) in the last year alone”. 13 The first cause of the banking crisis was the fact that deregulation took place without the creation of an effective system of prudential regulation and supervision to replace the post-war system.
Deregulation generates competition. Banks lost their guaranteed profits, market niches, and the franchise value of deposit-collecting branches. This created a situation of moral hazard, in which banks took on greater risk in the expectation that if they suffered losses the Ministry of Finance would bail them out.This was particularly true of the Big Banks, assumed to be too large to be allowed to fail. The second cause of the banking failures was first the creation in the late 1980’s and then the bursting of the stock market and real estate bubbles in the early 1990’s. This had a direct impact on its balance sheets and bad debts. The third cause of the ongoing banking failures is due to globalisation.
This refers to changes both in the world political and economic environment and in Japan’s now major position in the world economy.The fourth cause is the high rate of innovation in finance. This now includes a wide range of sophisticated high tech derivatives, complex trading technologies, and changes in scale and organisation for the efficient management of financial services. Japanese banks have been unable to learn many of these new technologies sufficiently in order to be able to compete in such markets with foreign banks. Some of Japans bank failures were the Hokkaido Takushoku Bank, Bank of Japan and the Nippon Credit Bank.
United Kingdom SystemCommercial bank failure has fortunately been a rare event in the United Kingdom. The only commercial bank failure was City of Glasgow Bank, which was founded in 1839. Throughout its short history it had expanded rapidly, and by 1878, it had the largest branch network in Scotland. The bank failed in 1878. There hasn’t been any recent bank failures and goes to show that through good management and infrastructure as well as regulatory controls and having the Bank of England as lender of last resort have allowed there not to be failures.Conclusion It can be seen that bank failures come from a range of different reasons, both internally and externally. America has shown through its banking system that the causes have been internal in the 60’s, where the biggest cause was due to bad loans/debts and then on the other hand the causes in the late 90’s have been internal due to poor management. In the 70’s and 80’s was one of the worst years for America, it had the highest bank failures with a total of 1364.
It faced both internal and external causes for bank failures, this was down to oil crisis and recession for external factors and for internal came down to poor management. The poor economic conditions did make it more difficult for a bank to survive but the policies and procedures of the banks management and the board of directors had the greatest impact on whether a bank was to succeed or fail. Economic decline contributed to the difficulties of many of the failed and problem banks. It was a significant cause of the problems in more than one-third of the banks.However, the economic factors weren’t the sole cause of bank failures.
It can been seen that external factors did contribute to bank failures in America but the main reasons for the failures were down to poor management and control systems to deal with the economic conditions. Japanese banks seemed to be failing due to external factors, which were regulatory system, the bursting of the stock market, globalisation, and the high rate of financial innovation. These were the major factors that lead Japanese banks into failure and were mainly external causes.Japan didn’t suffer as many bank failures as America due to the difference in the size of the countries and the time line. To contradict both of these ideas, the United Kingdom hasn’t faced any commercial bank failures in the recent years, showing that having good management can deal with economic conditions and the right banking system can allow for banks to be effective, efficient and profitable. Although many of the problems that banks face were externally caused, the primary responsibility for bank failures rests solely on the shoulders of bank managers and boards of directors.
This responsibility does not allow for ineffective regulation or unforeseen economic developments as causes of failure, but the bank manager is the commander who needs to react to economic conditions and the regulatory environment and deal with it. Therefore, commercial banks fail due to both external and internal factors, if the right internal factors are present in the bank then it can deal with the external factors. If the proper internal factors aren’t present then the bank will fail due the pressure exerted from the external factors.