Question

Discuss the history of bank failures

Answer 1

Banks in the 1920's and early 1930's were numerous-over 30,000. This was a turbulent time period. Multiple economic recessions occurred. There were multi-year recessions. The underlying economic impact on consumers and businesses has been implacable and has led to a dramatic finale-the Great Depression. While the DJIA collapsed 37 percent in 1929, before it hit rock bottom, the index fell a full 87 per cent.

And the impact has been staggering for the banking industry. The number of banks fell by more than 50 per cent-more than 16 thousand! Although the documents are not transparent and definitive, data show that the bulk of the downturn was due to bank failures. There was no federal deposit insurance until the establishment of the Federal Deposit Insurance Corporation in 1934. Bank runs were becoming popular. Depositors are estimated to have lost more than $1.3billion.

Two of these episodes-Farm Crisis and Oil Sector Crisis-have been affected by (1) commodity prices and (2) the intrastate nature of banking legislation. A third episode-Savings & Loan Crisis-was affected by deregulation and increased lending and investment capabilities. Then the Great Depression then Financial Crisis arrived in the 2000's. Whereas the more common one-off bank failure is typically triggered by bad management or fraud, the particular root causes of these incidents of multiple bank and thrift failures resulted in larger failures.

The largest bank collapse in U.S. history happened during the 2007-2008 financial crisis when Washington Mutual, with $307 billion in assets, closed its doors. Another major bank collapse had happened when IndyMac was confiscated just a few months ago. The second all-time largest closure was Continental Illinois' $40 billion loss in 1984. In its website the FDIC maintains an extensive list of collapsed banks.

The FDIC was established by the Banking Act in 1933 (often known as the Glass-Steagall Act). One-third of American banks had collapsed in the years immediately preceding, which marked the beginning of the Great Depression. Average of 70 banks had collapsed nationally each year during the 1920s, until the Black Tuesday crash of 1929. 744 banks collapsed within the first 10 months of the Great Depression and about 4,000 American banks collapsed in 1933 alone. By the time the FDIC was established, American depositors had lost $140 billion due to bank defaults, and bank customers had no way to get their money back without federal deposit insurance covering those deposits.