What causes a bank to fail?

Question

What causes a bank to fail?

Answer 1

Lending more than they can cover, or making risky loans can lead to shaky foundations. Notice there are never just banks that just handle checking accounts. But there are banks that only do savings. They want you to invest in them. If you give your money to them, they can turn around and lend it out. But they can't lend out more money than they have without risk. If they lend out more than they have and the roof caves in, metaphorically speaking, then they cannot cover the debts they've incurred, and will fail.

However, banks have FDIC, Federal Deposit Insurance Corporation. This is a guarantee that the bank will not fail. Your money is safe. If the bank does go bust, they will be absorbed/bought out by another bank. If need be, the federal gov't uses a nasty word called bailout. This means the federal gov't pays the bank back for the funds they lost.

But consider, the funds they've lost is due to mortgages nobody can afford. Then consider that the federal government money is really the people's taxes. So, while you're safe in depositing your money, and are guaranteed it will be there to use, if the bank needs a bailout, you and I are all going to cough up a few bucks until the bank is back on it's feet.

This is inflation. Everything gets more expensive so that we can make up for the fact that no one paid back their loans on stuff they couldn't afford in the first place. It's happening now.

Answer 2

They could be overlending.

Answer 3

i dont know

Answer 4

Banks take the money you give them to "hold" en masse. They pay you for this (in interest.)

They then use that money to invest it into other money-making "securities."

When those other money-making "securities" fail - which is soooo rare as to not even be believed, but nonetheless still a risk (coz after all, it is, in reality, only a gamble not unlike playing a slot machine or the stock markets)

-then the banks cannot pay thier own losses, and the $$$ they "borrowed" from you (the investors) cannot be paid back!

Answer 5

Their capital ratio falls below the acceptable percentage.

Each year, a percentage of the bank's profit becomes part of their capital.  If they have a good year, they add to their capital.  If they have losses, they lose capital as a percentage of their assets.

The bank regulators will act quickly if a bank's capital ratio falls below 5% of assets.  They will initially work with the bank to try to improve its capital ratio.  If those efforts fail, they will force the bank to close.

Loan losses can cause a bank's capital ratio to fall.  That is happening with much greater frequency in the current lending crisis.

Also, a run on the bank can cause the bank to fail.  The bank has only a little bit of liquidity compared to the amount of deposits they take in.  If everyone panics and wants to withdraw their money, the bank has trouble creating enough liquidity to meet the demand.

Additional Comments:  FDIC insurance only protects depositors.  It does nothing to prevent a bank failure.  When a bank failure occurs, those customers whose deposits are fully insured will be reimbursed by the FDIC.  The bank still fails.

Answer 6

They lose money, mostly by lending money to deadbeats. It's the bank's fault for not being careful about whom they lend money to.

Answer 7

They don't fail. That's where all my cash is.

Answer 8

Lack of money same thing that causes a person to go bankrupt.  In general they lend money for whatever (like to millions of people to buy overpriced houses in california).  No matter how carefully they lend some loans will go bad, but if the whole market goes down then lots of their loans fail.  They only have a certain amount of money in reserves to pay the losses on these bad loans (even though they don't get paid for these loans they still have to pay the people who lent them the money to make the loans) and if their losses burns through all their reserves and they can't get money somewhere else they simply run out and become insolvent ie they fail.

Answer 9

Someone in the  bank is stealing the money.

Answer 10

Lots of them loaned money to people to buy a house (or to a group to pay for a large building to be built) and the owner does not pay the loan off because they either lost their job, or the group did not get anyone to rent space in their building, etc.  They walk away from the loan, and the bank does not get paid back.  Lots of banks have people working for them who make bad decisions about who to loan money to.  Some people claim those bankers are getting bribed to OK the loans.  That's just one simple reason.  There's lots of others.

Answer 11

Too many bad loans.

Banks typically keep 10 cents in cash for every dollar they loan out.

It does not take a rocket scientist to figure out it would not take too many "Bad Loans" till your 10 cent reserve would run out.