Bank Failures Closings
A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. More specifically, a bank usually fails economically when the market value of its assets declines
to a value that is less than the market value of its liabilities. As such, the bank is unable to fulfill the demands of all of its depositors on time. Also, a bank may be taken over by the regulating government agency if Shareholders Equity (i.e. capital ratios) are below the
The failure of a bank is generally considered to be of more importance than the failure of other types of business firms because of the interconnectedness of banking institutions. It is often feared that the effects of a failure of one bank can quickly spread throughout the economy and possibly result in the failure of other banks, whether or not those banks were solvent at the time. As a result, banking institutions are typically subjected to rigorous
regulation, and bank failures are of major public policy concern in countries across the world.
In the United States, deposits in savings and checking accounts are backed by the FDIC. Currently, each account owner is currently insured up to $250,000 in the event of a bank failure. Barring further legislative changes, the maximum will revert to $100,000 in 2014.
When a bank fails, in addition to insuring the deposits, the FDIC acts as the receiver of the failed bank, taking control of the bank’s assets and deciding how to settle its debts.