Why Banks Fail

Description

The high-profile failures of Silicon Valley Bank, First Republic Bank and Signature Bank in the US, and Credit Suisse in Switzerland, spawned global headlines and waves of investor and client panic between March and May 2023. How could large financial institutions with billions on their books fail out of the blue?

The banking system is built on trust. Central to this idea is the public perception of banking as a safe industry, and the positioning of banks as stable institutions, bolted into the very heart of society. But banks fail far more frequently than we might expect.

In the US alone, more than 560 banks have failed since the turn of the century. In South Africa, the collapse of Saambou in 2002 sparked the “small banks crisis”, which saw half the country’s banks deregistered by the end of the following year.

The banking business model is inherently risky owing to the issue of liquidity – banks lend long and borrow short, and in doing so, extend credit to society. Over centuries, this has been critical for driving business and allowing economies to grow. But because banks are highly leveraged, they face the ever-present risk of customer deposits being simultaneously withdrawn – the much-feared bank run. And this is increasingly more likely in the online age when customers can move their funds in a digital instant.

This book explores the question of why banks fail, considering both the technical and social factors that lead to bank failure. Moreover, it contemplates what practical steps should be taken to restore trust in banks, in the financial system as a whole, and in the very idea of capitalism itself.