Good question. Why do banks fail?
Well its a very complicated but not complicated answer. I’m going to go over 5 reasons why banks fail and a few ways you can protect yourself to keep this from destroying you financially.
But before we get into all of that allow me to re introduce myself.
My name is DeVaughn Put in Work Burke The Wealthbuilder himself and if you love content like this post and talking about making more money, saving more money and building a better you and business then go ahead and subscribe to this blog and enjoy this post.
- Bad Loans
Loans comprise a large part of the traditional banking business, along with holding depositor money. Before the later part of the 20th century, banks primarily made loans to individuals to buy homes and to businesses to enable them to grow.
Credit analysis skills are critical to this line of business. In this regard, most large banks have huge training programs dedicated to the development of new lending officers, who are taught how to assess the risks of borrowers and protect the bank’s assets and profitability.
When credit standards are lowered, to attract more lucrative business, loan losses inevitably increase and create financial problems. In the past, risky loans to foreign countries, real estate investment trusts, and mortgage companies have created severe problems for banks and ultimately caused some to fail.
2. Funding Issues
Banks have balance sheets that carry huge amounts of assets. These assets are generally financed with a combination of short-term credit, bonds and equity. When a bank has problems refinancing its debt or repaying it, the bank may fail.
Funding problems are sometimes related to general market conditions, but more often occur because investors lose faith in the bank for some reason.
3. Asset/liability mismatch.
When a bank’s assets are unmatched to the liabilities supporting them, severe problems can arise. The simplest example is a floating rate liability financing a fixed rate loan. If interest rates rise, the bank pays greater and greater interest on its liability while the fixed rate loan pays the same rate.
This mismatch can result in a huge loss. When a large portion of a bank’s portfolio is mismatched, the results can be devastating.
4. Risk management decisions.
All large banks have extensive risk management groups that constantly quantify the absolute level of risk in the bank’s portfolios. They measure risk from every conceivable perspective including interest rate risk, foreign debt risk, investment risk and much more.
When miscalculations occur in conjunction with a significant market movement, huge losses are possible.
5. Non Bank Activities
Over the years, banks have dabbled in non-traditional businesses looking to improve profitability. Experiments with real estate investment trusts, leasing companies, consumer finance companies and non-bank foreign subsidiaries were mostly unsuccessful and resulted in huge losses.
All in all there a bunch more reasons why banks fail but you check that out at the link here and read the full article.
So how can you protect yourself from a bank failure?
First thing is to never put more then $250,000 in a single Bank. Especially if its your personal money. Because anything above $250,000 is not FDIC insured.
2nd thing is to make sure to have cash in a safe. If you can have at least $10,000 saved in your account that will be best. I know it might take you a while to get there but the way these banks are crashing now a days having some liquid paper cash in a safe at home is worth the trouble.
3rd thing is to invest your money and don’t just hold it in a bank. Because as you can see you never know when things might change.
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Himself DeVaughn Put in Work Burke
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Why Do Banks Fail? How Can You Protect Yourself?
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