What are the main determinants of bank failure Essay - 1

What are the main determinants of bank distress - Essay Examplee recent pecuniary crisis has raised a large number of concerns most the strength of the current banking system to provide stability to the financial markets. Banks taking too much try are highly prone to fail unless they have hedged their risks properly.Banks may fail if rightfulness is lacking(p) to provide a safe cushion to write down any non-performing loans (Kolari, pp. 361-387, 2002). Before recent financial turmoil, banks were more concerned about their profitability. They attempted to maximize profits to increase shareholders wealth by change magnitude their financial advantage. A large deposit baseborn provided for high financial advantage for banks, while their righteousness cushion continued to diminish. Most banks were using a ratio of more than twenty times debt compared to their equity (Goddard, pp. 1911-1935, 2007). Low level of equity provided a very sm on the whole cushion for the banks in case of a financial turmoil. A bank with three percent equity could suffer a loss of all its shareholders wealth if it lost just a minor fraction of its loan assets. For example, bank with an equity base of 10 million pounds and a loan base of as high as 300 billion pounds, would have lost all its equity with a decrease of 3.33% in the value of its loan assets (Altman, pp 589-609, 1968).Banks submit to manage their liquidity risk with extreme caution. A bank that maintains to little liquid reserves hind end go bankrupt if it fails to meet its obligations on time. These obligations include payment on demand deposits and interest payments to depositors memory cash in their saving accounts. If the bank is holding too little cash, it can usually draw money through inter-bank borrowing at the federal funds rate (Ohlson, pp. 109-131, 1980). However, at times of financial crisis, the liquidity of the market could be low. In the recent financial crisis rumors about bank failures resulted in a run on banks. Depositors wanted to withdraw their money before a suspected bankruptcy. On a usual day banks