Bank failure
Bank failure or " bank crash" is the slang expression for the temporary or permanent insolvency of one or more credit institutions in a country. The term can - but does not have to - be identical to the legal term insolvency .
General
No sector in an economy has such a central, prominent and system-securing role as credit institutions. Banks are essential for the functioning of an economy: without banks there is no orderly flow of general payment transactions, sooner or later non-banks will become insolvent (because they either no longer receive a loan or cannot dispose of their financial investments) and stock exchanges can no longer conduct the securities business . Therefore, it is the goal of national governments to keep the banking system functioning.
Causes and symptoms
A general economic crisis or a specific banking crisis usually precedes a bank failure. Exceptions are individual difficulties at a single credit institution, which only have isolated effects. Most of the time, however, many institutes find themselves in a crisis at the same time. This is due to the hardly differing investment strategies, which contribute to the fact that banks have similar portfolio structures and are therefore subject to equally weighted risks. If a risk then arises, many institutions are affected at the same time due to the high correlation between the banking risks. The close interbank relationships (i.e. banking transactions between the credit institutions) also ensure further mutual dependencies.
For both forms of the banking crisis, outsiders can best recognize them from the interest rates on investments. If the interest rates of a credit institute or a group of institutes are significantly above the average interest rate offered by other institutes, which is comparable for the type of investment and duration, this can be seen as an indication of an emerging crisis. Then creditors are apparently only willing to lend money to this institute only for a higher risk premium, which will be reflected in the rating of the rating agencies for this institute. The rating of an institution is therefore an important indicator of a bank's creditworthiness.
System relevance
As part of the processing of the financial crisis from 2007 the issue was systemic importance (English importance systematical , English word too big to fail ) examined more closely by banks. In the USA this question had been raised repeatedly since 1914 at the latest. The insolvency of a single large financial group can lead to uncontrollable reactions on the international capital markets due to the close interlinking of the international financial markets. Credit institutes or groups of institutes which, due to their size, importance or networking, are considered to be "systemically relevant" or "system-supporting" have so far been able to rely on being the first to be rescued in the event of a government rescue operation .
The course of the US rescue operations in relation to the financial crisis from 2007 onwards showed that this reliance on rescue does not represent 100 percent security: While several institutions were actually rescued, the bankruptcy of the investment bank Lehman Brothers and Washington Mutual in September 2008 were accepted. Washington Mutual was the largest US building society and had to be sold to JP Morgan . At the building society, customers had withdrawn a total of US $ 16.7 billion in liquidity between September 15 and 26, 2008, so the building society "does not have sufficient liquidity to meet its obligations". This made Washington Mutual - in terms of deposit volume - the largest bank failure in the United States. JP Morgan had already taken over Bear Stearns , one of the four US investment banks, in March 2008 . The other four also disappeared in the course of the banking crisis in September 2008: Lehman Brothers was liquidated on September 11, 2008, Merrill Lynch was taken over by Bank of America on January 1, 2009 , and Goldman Sachs and Morgan Stanley turned into commercial banks at (September 17, 2008).
The US bailouts for the banking industry also extended to smaller, non-systemically important banks: Smaller banks of only regional importance were much more likely to go bankrupt in the US. However, the bankruptcies do not lead to a complete loss of the deposits because , according to the Federal Deposit Insurance Corporation (FDIC), they are fundamentally protected. The FDIC expected more bankruptcies among the well over 8,000 US banks. In October 2008 - almost at the same time as several other countries - the US government decided on a Troubled Asset Relief Program (TARP) of 700 billion US dollars to support more than 350 banks, the one with the Dodd –Frank Act was reduced to US $ 475 billion, with expenses of US $ 441.7 billion compared to revenues of US $ 426.4 billion.
According to the former US Federal Reserve Chairman Bernanke, a restoration of the financial system was the basic requirement for a sustainable recovery of the real economy during the financial crisis from 2007 onwards . He underlined the need to continue to support systemically important banks and financial institutions in order to avoid a failure.
Today, the global financial system by the Financial Stability Board (English Financial Stability Board , abbreviated FSB) made some important requirements for systemically important banks; among other things, he publishes the list of global systemically important banks .
Switch tower
- See also bank run .
Since credit institutions manage the majority of the population's wealth, the population's trust in a crisis-proof banking system is of essential importance. If a banking crisis then occurs, the risk of a panic attack by investors on the bank concerned (“ bank run ”) is very high , as was the case with “ Northern Rock ” in Great Britain in September 2007. In terms of their balance sheet structure, banks are only geared towards the population's normal withdrawal (cash withdrawal) habits. Your cash holdings and primary liquidity (which can be instantly converted into cash) are lower than the bank money held in the accounts. Only a very small part of the financial investments at a bank is available as cash and so-called primary liquidity for payments. These holdings correspond to the expected normal withdrawal habits of bank customers. However, if there is an unexpected massive disbursement of the investments, the customer's requests for disposal can no longer be met. This panic reaction by broad masses of the population has negative psychological effects on the entire banking and national economy of a state, so that governments are keen to prevent such mass effects by early identification of emerging crises. This can be done through preventive and detailed banking supervision.
The insolvency of a bank may in its indebtedness be justified. If the bank were insolvent but not over-indebted, it could easily purchase cash and other means of payment from its central bank if the central bank is willing to accept the bank's debt securities as recoverable ("eligible securities") and therefore buy these debt securities for money or to pledge. However, the bank in question is often unable to offer any debt securities that are eligible for central bank credit because it only has assets with poor ratings .
Protection against banking crises
Because of their central importance for a functioning economy, banks are monitored worldwide by international and national laws. The national governments are responsible for enacting laws specific to the financial market ( banking regulation ). In the countries with the most important financial markets, special national authorities have been set up to apply these laws and supervise the banking system ( banking supervision ). The functionality of the monitoring systems is to be explained using the example in Germany; almost identical systems exist in Austria and Switzerland.
Banking supervision
Since its establishment in May 2002, the Federal Financial Supervisory Authority ( BaFin ) has united the supervision of banks (previously: BaKred) and financial service providers, insurance companies and securities trading. It is organized as an institution under public law , is subject to the legal and technical supervision of the Federal Ministry of Finance and is financed from fees and allocations of the supervised institutes and companies. The supervision of credit and financial services institutions (institute supervision) is exercised by BaFin in cooperation with the Deutsche Bundesbank ( Section 6 (1) and Section 7 (1) KWG).
Supervisory laws
Detective and preventive banking supervision is based on a large number of laws and ordinances that apply in the relationship between credit institutions and banking supervision. Instead of many, the Bundesbank Act (BBankG), the Banking Act (KWG), the Solvency Ordinance (SolvV), the Ordinance on Large Loans and Millions of Loans (GroMiKV) or the Minimum Requirements for Risk Management (BA) (MaRisk) should be mentioned. These rules, some of which are highly complex (e.g. SolvV), specify in detail how and within what limits risky banking transactions may be conducted. The often monthly reporting and notification obligations to BaFin or the Bundesbank (monthly statements in accordance with § 25 KWG or § 18 BBankG) codified here provide them with a precise, up-to-date picture of the economic situation of the credit institutions. The main goal is to guarantee a functional, stable and honest German financial system. Bank customers, insured persons and investors should be able to trust the financial system.
The crisis regulations in section 46a of the KWG, the obligation to notify insolvency under section 46b of the KWG or the bank moratorium in the event of serious threats to the economy as a whole by the federal government under section 47 of the KWG are of particular preventive importance .
Central banks
Central banks or central banks are institutions that are responsible for the implementation of the monetary and currency policy of a currency area. Since there are both national and supranational currency areas, central banks exist both at national level (e.g. Deutsche Bundesbank ) and at supranational level (e.g. European Central Bank ). Central banks are mostly state institutions and to a certain extent have sovereign tasks; Due to their function, they are treated as equivalent to central governments ( Section 26 No. 2 b SolvV). The Deutsche Bundesbank is organized as a federal corporation under public law and, according to Section 18 BBankG, can request statistical surveys from the affiliated credit institutions. It determined the credit and open market policy according to § 15 BBankG and the minimum reserve policy according to § 16 BBankG, both of which serve to influence the flow of money and the granting of credit. The Bundesbank and European Central Bank thus control the money market, which is the most important short-term refinancing source for credit institutions. That is why the Bundesbank and the European Central Bank decided in October 2008 to expand the collateral framework for “eligible securities” in response to the financial market crisis in order to improve bank liquidity. In addition to the liquidity policy, the central banks have also reacted with the interest rate policy to the worsening financial crisis and the associated intensification of growth risks.
Deposit insurance schemes
Deposit protection is the designation for the statutory and voluntary measures to protect the deposits (bank balances) of customers at credit institutions in their crisis. If support occurs, the liquidity of the institution concerned is made available through funds from the responsible deposit insurance fund. Similar provisions are made in the statutes of the liability funds of the other groups of institutes. Further comprehensive information on the subject can be found in the article Deposit insurance.
State rescue operation
The financial crisis from 2007 onwards led to national rescue operations , i.e. special measures to secure the banks' financial security. In Germany, the Financial Market Stabilization Fund (SoFFin) was founded in October 2008 on the basis of the Financial Market Stabilization Act (FMStG). The institution decides on measures to stabilize individual banks, for example through so-called bad banks . It is responsible for the administration of the financial market stabilization fund, which is estimated at 480 billion euros and from which the state aid for individual support measures is financed. The institution is subject to the legal and technical supervision of the Ministry of Finance. The “Financial Market Stabilization Fund”, as it is officially called, is supported by the Bundesbank in terms of technical, organizational and banking technology. Here, too, the company's importance for financial market stability plays a role in support.
The above sequence is a kind of "sequence cascade". If, despite banking supervision, difficulties should arise in the banking system due to the extensive supervisory regulations and the intervention of the central banks in the money markets, the deposit guarantee systems and state rescue operations are ultimately available as fallback instruments.
Ways out of the financial crisis
The SolvV, which has existed since 2007, could not prevent the crises of individual institutes in Germany. Adequate warning signs (such as compared to the excellent rating of CDO's excessive credit spread ) were not recognized or neglected in banks. For this reason alone, the benefits of institutionalized early warning systems are largely overestimated. So far, there are no reliable crisis indicators, especially since all previous financial crises arose from the most varied of constellations. There were also warnings of the current financial crisis, such as overly liberal lending. From the few indications, however, the dramatic extent of the financial crisis could not be extrapolated. It is therefore doubtful whether stricter and even more detailed regulatory provisions will succeed in preventing future financial crises. It is more a matter of continuing to use the extensive liquidity operations of the European Central Bank and the Bundesbank to date with sensitivity. So far these have prevented the financial crisis from escalating further; the actual core cause, the lack of transparency in the financial market and, as a result, the lack of trust between market participants in the interbank money market, can, however, be eliminated with more stringent laws or with liquidity policy.
Web links
- Federal government on the Rescue Takeover Act with important information on avoiding economic dangers from April 3, 2009 ( Memento from December 21, 2011 in the Internet Archive )
- Speech Hermann Remsperger: Stability policy in the field of tension between price risks , growth risks and market turbulence . December 10, 2008 Deutsche Bundesbank
References and comments
- ↑ Uwe Christians: Financial Intermediation - Bank Risks, Insolvencies, Bank Runs and Reasons for State Banking Supervision . March 2008 (PDF) p. 36f.
- ↑ Eric Dash: f It's Too Big to Fail, Is It Too Big to Exist? In: New York Times. June 20, 2009, accessed August 24, 2018 .
- ↑ Focus from October 7, 2008
- ↑ The world about the bankruptcy of the "Washington Mutual"
- ↑ FTD on the "Washington Mutual" ( Memento from September 27, 2008 in the Internet Archive )
- ↑ Manager magazine with statistics on insolvent US banks
- ↑ Handelsblatt on the US bank failure
- ↑ International Herald Tribune, February 12, 2009
- ^ TARP Programs. In: US Department of the Treasury. Retrieved June 18, 2015 .
- ↑ Ryan Tracy, Julie Steinberg, Telis Demos: Bank Bailouts Approach a Final Reckoning. In: The Wall Street Journal. December 19, 2014, accessed June 11, 2015 .
- ↑ Bernanke signals further support for systemically important financial institutions. In: Web.de. March 10, 2009, archived from the original on March 31, 2009 ; accessed on August 24, 2018 .
- ↑ BaFin ( Memento of the original dated April 2, 2009 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- ↑ For example, the support case according to § 3 Paragraph 1 of the statutes of the Sparkassenstützungsfonds of the Westfälisch-Lippischen Sparkassen- und Giroverband exists “in the event of impending or existing economic difficulties of a member savings bank…, especially if it is not in a position to find its own on its own To avoid a loss report that could endanger the existence of the company or a suspension of payments ”. In Paragraph 2, financial covenants are specified, the failure of which is intended to trigger the support case
- ↑ SoFFin ( Memento of the original from June 12, 2009 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
