Clustering bank failures tend to be clustered around a few years

Conquering The Coming Collapse

Conquering The Coming Collapse

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Looking at failures across a number of countries, there appears to be a clustering effect in relation to bank failures. In the United States, there were serious banking problems in the 1931-39 and 1981-90 periods. In Spain, 48 banks failed between 1978 and 1983, and in Japan, banking problems have persisted through the 1990s. The presence of a herd instinct among depositors and investors would explain a run on several banks over a relatively short period, and more recently, this has been coupled with a flight to quality or to banks thought to be too big to fail. However, it does not explain why banking problems last for up to a decade, suggesting that macroeconomic factors are at work.

An alternative, but related, reason for clustering may be the failure of timely intervention by the government.18 Japan is the best recent example. Although the stock market collapsed in 1989, there were no immediate injections of liquidity into the economy, prompting a decade-long recession, which, as has been noted earlier in the chapter, included the collapse of substantial numbers of financial firms, threatening the soundness of the financial system. The government succumbed to pressure for an overhaul of the financial system by the second half of the 1990s. The result was the announcement of three 'big bangs' in 1997, with the reforms in place by 2001.19 The market reforms are based on 'FREE' (emphasizing free market entry, free price movements and the removal of restrictions on financial products), 'FAIR' (introduction of transparent markets and rules, with an investor protection scheme), and 'GLOBAL' (all financial markets to be opened up to global players, with adherence to international legal, accounting, and supervisory standards). The authorities also agreed to 100 per cent deposit insurance cover.20

To conclude this section, seven factors have been identified as the contributory factors to bank failure. However, the discussion itself illustrates that most failures are explained by an interaction of the various causes listed above. A more precise answer can be supplied by quantitative models.

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Financial End Game

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