Handorf, William C. --- "Lessons from 2008 US Bank Failures" [2010] ELECD 696; in Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur (eds), "The Panic of 2008" (Edward Elgar Publishing, 2010)

Book Title: The Panic of 2008

Editor(s): Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802611

Section: Chapter 7

Section Title: Lessons from 2008 US Bank Failures

Author(s): Handorf, William C.

Number of pages: 8

Extract:

7. Lessons from 2008 US bank failures
William C. Handorf*

Although bank crises commonly occur every 10 to 15 years in some region
of the world, the underlying asset classes and countries responsible for
such crises shift. The current global banking catastrophe has largely arisen
out of unsafe residential real estate lending in the United States and toxic
collateralized debt obligations backed by very high-risk classes embed-
ded within mortgage-backed securities. Governmental leaders in many
countries have taken unprecedented steps to minimize further disruptions
to their financial markets and economies by increasing deposit insurance
levels, guaranteeing short-term and long-term debt previously issued by
financial institutions, and investing in preferred stock of selected banks
whose survival is deemed important. Bank failure is not a new phenom-
enon and it is not costless.
Countries from all continents have previously incurred significant
fiscal costs to bail out unsuccessful banks and recapitalize or nationalize
salvageable institutions. If banks are unable to intermediate funds from
surplus savings sectors to worthwhile deficit borrowing sectors, economic
problems escalate within a country because consumers and businesses
are unable to finance the production or consumption of durable goods,
working capital or plant and equipment. The consequences of a failing
banking system can also be severe when banks finance a sizable portion
of governmental debt. A credit freeze precipitates dire economic problems
for the remaining fragile financial institutions. This chapter briefly reviews
bank risk within the context of the ever-increasing number of bank failures
within ...