Bank failures
Bank failures: The Eighteenth and Nineteenth Centuries
Bank failures: The Early Twentieth Century
Bank failures: The 2008 Financial Crisis
Definition: Closure of financial institutions resulting from their inability to pay their depositors and other creditors
Significance: Before the 1940’s, bank failures were a major contributor to business depressions, depriving depositors of their money and reducing the availability of loans. Since then, insurance provided by the FDIC has helped minimize the effects of failures on the overall U.S. economy.
The U.S. banking system has long been characterized by a large number of relatively small banks, mostly operating on a local basis only. Such small institutions are often unable to diversify their assets, and they are thus at risk for insolvency. Further, banks have often faced liquidity problems—that is, they have found it difficult to maintain enough cash on hand to meet depositors’ demands. After 1933, the operations of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) greatly reduced both the solvency and the liquidity problems of American banks.
Further Reading
- Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton, N.J.: Princeton University Press, 1957. Extensive coverage of scandals and controversies; good exposition of the rise and fall of the Second Bank of the United States.
- Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. 8th ed. New York: Pearson/ Addison Wesley, 2006. This excellent undergraduate text deals with modern bank failures in chapter 11.
- Wicker, Elmus. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000. A distinguished economic historian looks at the interaction between bank panics and economic fluctuations during the late nineteenth century.
- _______. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996. Wicker’s earlier work details the causes and effects of the Great Depression within the banking industry.
See also: First Bank of the United States; bankruptcy law; Financial crisis of 2008; Panic of 1857; Panic of 1873; Panic of 1907.