Complete 4 page APA formatted essay: What are the main determinants of bank failure.
e recent financial crisis has raised a large number of concerns about the strength of the current banking system to provide stability to the financial markets. Banks taking too much risk are highly prone to fail unless they have hedged their risks properly.
Banks may fail if equity is insufficient 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 increasing their financial advantage. A large deposit base provided for high financial advantage for banks, while their equity 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 small 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 billion 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).