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What are the Causes of the Bank Failures in 2009?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 30 November 2016
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In the United States, there were 140 bank failures in 2009, with causes attributed to the poor economic climate and the pressure it exerted on banks. Many of these failures were very large and included high profile financial institutions, but smaller regional banks were also affected. Fundamentally, all of the bank failures in 2009 involved a dramatic fall in capital, causing banks to be unable to meet their obligations. The Federal Deposit Insurance Corporation (FDIC), which often takes failed banks into receivership and oversees proceedings when banks fail, maintains a list of troubled banks and monitors those financial institutions closely in order to be able to step in when they appear to be in financial trouble.

One of the precipitating causes of the financial crisis of the 2000s was the collapse of the real estate market. Many banks had very large mortgage loans out and started to experience capital flow problems as people and businesses defaulted on mortgage loans. This created a ripple effect, as mortgage-backed securities also began to fail, throwing investors into a panic, and the economy as a whole began to be dragged down, leading to unemployment, rising default on personal debts, and worries among members of the general public.

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Many of the bank failures in 2009 were caused by widespread debt defaults. Assets controlled by banks failed and the banks could not keep up with their reserve requirements. Banks rely on a steady flow of funds in and out through loans, accounts, and other financial products. When the flow of funds began to be restricted, banks were no longer able to meet legal requirements to remain open, and the FDIC took these institutions into receivership, compensated investors, and supervised the transfer or closure of the banks.

The credit crisis was also a contributing factor. As the availability of capital tightened up, credit slowed to a trickle as well. Banks were unable to make loans to each other, a common practice used to help banks meet reserve requirements, and were unable to make investments to keep their capital high. Regional banks were hit especially hard by the credit crunch, as not all were eligible for federal assistance and many failed due to lack of support. Bank failures in 2009 were concentrated in high population states with very inflated real estate values like Florida and California, illustrating the interconnected nature of real estate and financial health in these regions.

Economists also noted that as banks failed and the economy became more uncertain, consumer and investor confidence faltered. This resulted in more bank failures in 2009 than might have been expected on the basis of the economics of the situation alone.

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Drentel
Post 3

What I like best about the big banks is that they have more branches and automatic banking machines. When I travel I can easily find a branch of my bank. Nobody wants to see bank failures like in 2009, but the average customer was not greatly affected because the government covered most of the loses through the FDIC.

Animandel
Post 2

Personally, I think credit unions are the safest banks and a better choice than regular banks. Credit unions do sometimes fail, but even when this happens they usually merge with other credit unions.

Also, credit unions are not solely concentrated on making a profit. They usually offer higher interest rates on deposits and charge less on loans. I was surprised at all of the extra benefits I got when I switched to a credit union.

My credit union periodically offers classes/seminars where they speak with you about ways to handle your money smartly. I feel like the employees at my credit union are actually interested in seeing me succeed financially.

mobilian33
Post 1

I don't have a lot of money, but I would be afraid to put it in one of those larger banks that invest tons of money in real estate all over the world and who knows what else. I do all of my business with a family owned local bank that has been passed down through the generations. This bank is part of the community. I know the owners and they are heavily involved in the community.

The problem with big banks is that they are faceless, and the people running the banks are only concerned about making as much money as they can. They don't care about their customers, only their customers' money. This is why the people at the larger banks are more likely to make risky financial decisions that might lead to bank failures like happened in 2009.

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