Banking system is the crucial part of any economy. The social costs of bank collapses are heavy and the government pays a heavy price for such failures. Bank collapses could be caused due to various factors like asset price bubble and collapses, legal and prudential weaknesses etc. The central bank can reduce such failures by effectively using the monetary tools and instruments besides stringent regulatory control. The Basel II Accord is also very effective in plugging the loopholes in the system.
Banking
system is the lifeline of an economy. Such being the importance
of the banking system, any bank collapse or a string of
bank collapses would invariably mean that an economy's lifeline
gets choked. Stories of bank collapses are varied worldwide
and happened over a period of time. We have to look at just
a few such instances to assess their terrific impact not
on the domestic economy alone but also on global economies.
Bank collapses could be caused due to a number of reasons.
The International Conference on "Challenges to Central
Banking from Globalized Financial System" that was
held at the IMF in Washington D.C. on September
16-17, 2002, identified the following reasons as the sources
of such problems.
It
was way back in 1931, that Credit Anstalt, Austria's biggest
bank, failed. During the Era of Depression, Credit Anstalt
had taken over a rival bank that was high on debts. It found
itself in such a position that it could not meet the debts
during the depression era. The resultant effect was that
the anti-democratic Fascist and Nazi movement swelled in
Austria. This crisis spread and caused a bank crisis in
Germany. As a result, the giant German Danat-Bank collapsed.
When other banks followed suit, the situation became so
severe that the German Government closed banks for two days
in order to prevent further withdrawals. This panic also
led many youth to join the Nazis.
Since
1980, it is Latin America, more than any other region in
the world that has had a negative track record with 22 countries
suffering from either financial crisis or distress. In the
two bank collapses in Ireland i.e., those of Irish Trust
Bank Ltd. in 1976 and Merchant Banking Limited in 1982,
depositors lost their savings. In 1982, Allied Iris Bank
(AIB), Ireland's largest bank, which was in a quagmire of
losses, failed the Insurance Corporation of Ireland. In
Britain depositors lost their entire savings in the Bank
of Credit and Commerce International (BCCI) during the 1990s.
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