Shelagh heffernan modern banking phần 6 ppsx

[ 344 ] M ODERN B ANKING level. 90 A rescheduling variable (RESC), the dependent variable lagged by one year, was also included as an explanatory variable, and found to be significant at 1%, indicating the presence of positive serial correlation, Thus, if a country rescheduled one year, it is likelier to do so the next. When the model is estimated for the later period, Rivoli and Brewer find its overall explanatory power falls. The parameter estimates are smaller, so their usefulness as explana- tory variables is reduced, and the ratio of reserves to imports is no longer significant. The correct overall prediction rate was found to be 20% higher in the earlier period. The next step of the investigation involved introducing the political variables. When added to the earlier model (1980–85), they are found to have little impact on overall performance. The only political variables found to be significant are the presence and length of armed conflict. According to the authors, armed conflict will place heavy demands on government budgets and often require large-sum hard currency expenditures, hence it could raise the probability of rescheduling. Adding the short and long-term political variables improved the prediction rate for rescheduling by 18% and 35%, respectively. Overall, the explanatory power of the economic and political variables was greater for the early period, 1980–85, compared to the later period. However, by adding the political variables (a political economic model), the correct rescheduling prediction rate improved by 9% (short-term measures of political instability) and 12% (long-term measures) in the early period. For the later period (1986–90) the correct prediction rate rose by 18% (short-term measures) and 35% (long-term measures). Recall that armed conflict was found to be the significant variable in the current study, which differs from the authors’ 1990 results, when government instability was found to affect bankers’ perceptions of a country’s creditworthiness and armed conflict did not. Part of the findings may be explained by the differences in dates of estimation: the early and late 1980s. Also, the dependent variable was different. More research is needed on how political factors affect a country’s probability of default. Balkan (1992) used a probit 91 model of rescheduling to examine the role of political (in addition to economic) factors in explaining a developing country’s probability of rescheduling. Two political variables were included in the model. A ‘‘political instability’’ variable is an index which measures the amount of social unrest that occurred in a given year. The ‘‘democracy’’ variable, reflecting the level of democracy, is measured by an index which, in turn, is captured by two components of the political system: participation (the extent to which the executive and legislative branches of government reflect popular will) and competitiveness (the degree of exclusion of political parties from the system and the ability of the largest party to dominate national elections). Balkan also included some standard economic variables in his model, such as the ratios of debt service to exports, interest payments to exports, and so on. In common with most studies all the explanatory variables were lagged by one year to minimise simultaneity problems. The sample period ran from 1970 to 1984 and used annual data from 33 developing nations. Balkan found 90 The lower the ratio, the smaller the amount of external debt being repaid, which means interest accruals will be building up. 91 Probit differs from logit in that it assumes the error terms follow a normal distribution, whereas in logit the cumulative distribution of the error term is logistic. [ 345 ] B ANKING IN E MERGING E CONOMIES the democracy variable was significantly negative: the probability of rescheduling fell as democracy levels rose. The probability of rescheduling rose with the level of political instability. The number of type I and type II errors fell when the political variables were included in the model. 6.5.5. Rescheduling and Debt Conversion Schemes Once a country has defaulted on sovereign debt, banks can hardly foreclose on the loans, put the country into receivership or insist on collateral – some of the nation’s assets. Though ‘‘gunboat diplomacy’’ was not unheard of as a means of putting pressure on a sovereign state in earlier centuries, it has not been considered an acceptable way of resolving such matters for many years. Since the Mexican announcement in August 1982, many indebted countries have entered into or completed renegotiations for the repayment of their loans. The International Monetary Fund (and, to a lesser extent, the World Bank) plays a critical intermediary role. Rescheduling agreements share a number of features in common: ž The agreement is reached between the debtor, the borrowing bank and the IMF. It typically involves rescheduling the total value of the outstanding external debt, with the debt repayment postponed. ž Bridging loans often feature, as does an IMF guarantee of interbank and trade facilities, sometimes suspended when a country announced that it was unable to service its external debt. ž The private banks normally agree to provide ‘‘new money’’ to allow the debtor country to keep up interest payments, raising the total amount of the outstanding debt. The IMF usually insists on increased exposure by the banks in exchange for IMF loans. ž The debtor country is required to implement an IMF macroeconomic adjustment programme, which will vary according to the economic problems the country faces. Governments are required to remove subsidies that distort domestic markets, meet strict inflation and budget deficit targets, and reduce trade barriers. Note the country loses some ‘‘macroeconomic sovereignty’’ because its government is now limited in its choice of economic policy. Thus, ex post, it can be argued that sovereign borrowing exposed these countries to high interference costs. Debt–equity swaps are another means of dealing with a sovereign debt problem, usually as part of or to complement an IMF rescheduling package. A debt–equity swap involves the sale of the debt by a bank to a corporation at the debt’s secondary market price. The corporation exchanges the debt for domestic currency through the central bank of the emerging market, usually at a preferential exchange rate. It is used to purchase equity in a domestic firm. It has proved unpopular with some countries because it can be inflationary, and the country loses some microeconomic sovereignty. Similar debt conversion schemes in the private sector have allowed firms to reduce their external debt obligations. Other types of swaps include debt–currency swaps, where foreign currency denominated debt is exchanged for the local currency debt of the debtor government, thereby increasing the domestic currency debt. A debt–debt swap consists of the exchange of LDC debt by [ 346 ] M ODERN B ANKING one bank for the debt of another LDC by another bank. Debt–trade swaps grew between emerging markets as a means of settling debt obligations between them. They are a form of counter-trade because the borrower gives the lending country (or firm) home-produced commodities. Alternatively, a country agrees to buy imports in exchange for the seller agreeing to buy some of the country’s external debt on the secondary markets. Debt–bond swaps or ‘‘exit’’ bonds allow lenders to swap the original loan for long-term fixed rate bonds, reducing the debtor’s exposure to interest rate risk. In a period of sustained rising interest rates, the fixed rate bonds will lower debt servicing costs for the borrowing country. The Mexican restructuring agreement of March 1990 was an early example of the new options offered to lenders. In addition to the option of injecting new money, banks could participate in two debt reduction schemes; either an exchange of discount bonds against outstanding debt or a par bond, that is, an exchange of bonds against outstanding debt without any discount, but with a fixed rate of interest (6.25%). The bonds are to be repaid in full in 2019 and the principal is secured by US Treasury zero-coupon bonds. Participating banks can also take part in a debt–equity swap programme linked to the privatisation of state firms–13% opted for the new money, 40% the discount bond (at 65% of par) and 47% the par bond. Exit bonds are now known as Brady bonds, because they were an integral part of the Brady Plan introduced in 1989. This plan superseded the earlier Baker Plan (1985), which had identified the ‘‘Baker 15’’, the most heavily indebted LDCs, as the key focus of action. 92 The Baker Plan also called for improved collaboration between the IMF and the World Bank, stressed the importance of IMF stabilisation policies to promote growth, and encouraged private commercial lenders to increase their exposure. The Brady Plan reiterated the Baker Plan but explicitly acknowledged the need for banks to reduce their sovereign debt exposure. The IMF and World Bank were asked to encourage debt reduction schemes, either by guaranteeing interest payments on exit bonds or by providing new loans. The plan called for a change in regulations (e.g. tax rules) to increase the incentive of the privatebankstowriteoffthedebt. Brady bonds are now a common part of loan rescheduling, and very simply, are a means by which banks can exchange dollar loans for dollar bonds. These bonds have a longer maturity (10 to 30 years) and lower interest (coupon) payment than the loan they replace – the interest rate can be fixed, floating or step. They can include warrants for raw materials of the country of issue and other options. The borrowing country normally backs the principal with US Treasury bonds, which the bond holders get if the country defaults. However, as the Mexican case in 1995–96 illustrates all too well, outright defaults are rare. As of 2001, about $300 billion worth of debt had been converted into Brady bonds. In 1996, the first sovereign bonds were issued by governments of emerging market countries after their economic conditions improved. Essentially this involves buying back Brady bonds: they are either repurchased or swapped for sovereign bonds. A secondary market for trading emerging market debt including Brady and sovereign bonds emerged in the mid-1980s. Most of it is traded between the well-known commercial and investment 92 Both Richard Baker and Tom Brady were Treasury Secretaries in the 1980s. They played no formal role in resolving emerging market debt problems but their ideas were influential. [ 347 ] B ANKING IN E MERGING E CONOMIES banks based in London and New York, as well as hedge funds and other institutional investors. The market allows banks to move the assets off their balance sheets, and for those with continuing exposure, it is possible to price these assets. 6.6. Conclusion This chapter focused on several areas of banking in emerging market countries. The objective was to provide the reader with an insight into several key issues: attempts to resolve problems arising from financial repression through reform of banking systems, sovereign and political risk analysis, and a review of Islamic banking. Until the last decade of the 20th century, almost half of the world’s population lived under communism. Communist regimes had extinguished the conventional, private sector, independent commercial bank. In country after country, throughout the former Soviet Union and its Warsaw Pact allies in Central and Eastern Europe, the 1990s were to see private banks return. China, still led by the Communist Party, also underwent profound financial changes as part of a broader economic reform, starting as early as 1979 and gathering pace in the new millennium. In India, the world’s largest democracy where banking has been subject to a high degree of state control, regulation and ownership, some cautious steps have been taken in the same direction as Russia and China. If the demise (or reinterpretation) of communism and socialism has been a great victory for the concept of the conventional western bank, the later 20th century saw two other developments that posed it challenges. One of these is the growing perception in many Muslim countries – and beyond – that the whole basis of the conventional western bank’s operations, lending at interest, is inconsistent with religious principles. The other was the periodic but serious issue of how western banks should respond to many emerging market governments that could not or would not service or repay the debt owed to them: the problem of non-performing sovereign loans. This chapter has chronicled these massive emerging market changes and their effects on the global financial landscape, especially banking. It began by analysing the phenomenon of financial repression, and exploring the question, a pressing policy issue for many countries, of whether foreign banks should be allowed to operate within their borders. Next came a survey of financial systems of Russia, China and India. Each are classic, but different, examples of financial repression in the late 1990s. The key question was whether the reforms they introduced were enough to alleviate some of the more serious problems arising from financial repression. All three countries have enjoyed some degree of success. Though Russia experienced the economic equivalent of a roller coaster ride, it has gone the furthest in terms of financial liberalisation, followed by China, provided it lives up to its promises to allow foreign bank entry by 2007 and liberalises interest rates. India is the laggard here, with no clean plans to reduce state control of the banking sector, though other parts of its financial sector have been liberalised. However, these countries are also experiencing a common problem: the difficulty each government faces in reducing or eliminating state ownership and control of banks. There is nothing wrong with state ownership per se, provided banks are free from government interference, have no special privileges which give them an unfair advantage, and have to [ 348 ] M ODERN B ANKING compete with private banks. Though India has allowed some private banks to open, it has signalled its intention to maintain a strong state presence in banking with very few policies aimed at encouraging the development of a vibrant competitive private sector able to take on the state banks. Russia has made the most advances – the banking sector was part of its privatisation programme. Unfortunately, the outcome is unappealing: bank oligarchies which confine their banking activities to the industrial group they serve/own, and state owned banks that will be difficult to privatise until something is done about the high percentage of non-performing loans. The state owned Sberbank has special privileges, which give it advantages over any potential rivals, especially in retail banking. If it is true that about 30 of the thousand plus banks are financially viable, Russia faces a future of unstable banking periods, which will do nothing to build up trust in the system, a key ingredient for a successful banking sector. One ray of light is the absence of restrictions on foreign bank entry, though efficient foreign entrants could imperil short-term financial stability if they are a contributing factor to the speedy collapse of costly, inefficient local banks. In China, scratch the surface of a joint stock bank and state control of the bank is quickly revealed. Most of China’s banks have a high percentage of non-performing loans, and the overt political interference by local governments in the credit coops is a symptom of a more serious dilemma. How can the central bank and regulatory body teach Chinese banks the rudiments of risk management when policy objectives (be they local, provincial or national) interfere with lending decisions? If unfettered foreign bank entry is allowed from 2007, their presence will contribute to the development of a more efficient banking system, but the price could be high in the short run as domestic banks are forced out of business. It is likely a one-party Communist State will intervene if Chinese banks face closure, which could threaten some of the market oriented policies it has introduced. Developing economies and emerging markets in Eastern Europe share similar structural problems, including inadequate monitoring by supervisory authorities and poorly trained staff, which have compounded general problems with credit analysis, questionable account- ing procedures and relatively high operating costs. Many developing countries exhibit signs of financial distress; the problem for banks in the emerging East European markets is debt overhang from the former state owned enterprises. A stable financial structure is some way off for Russia, but many of the transition economies that adopted a gradualist approach to financial reform have created workable and stable structures. These banks were found to be much closer to an efficiency frontier compared to Russian banks. Most Islamic banking is located in emerging markets, and this is the reason it has been discussed in this chapter. Its growth is important because it relies on a financial system where the payment of interest is largely absent. The development of financial products that conform to Shariah law has been impressive, and in this respect, Islamic banking has something to teach the conventional banking system. Nonetheless, there are several problems that need to be addressed, such as the tendency to concentrate on one or two products, which discourages diversification. Also, although moderated in some ways, the potential for moral hazard remains. Finally, the regulatory authorities and banks need to work together to come up with an acceptable framework to deal with the unique aspects of regulation associated with Islamic banking. [ 349 ] B ANKING IN E MERGING E CONOMIES The underdeveloped financial systems of emerging market economies make them depen- dent on external finance. Bankers face unique problems when it comes to the management of sovereign risk. The key lesson is that bank managers must assess properly the risks asso- ciated with any given set of assets. The sovereign lending boom of the 1970s demonstrated how bankers failed to acknowledge that illiquidity can be as serious as insolvency if there is no collateral attached to the loan, and this in turn led to poor assessment of sovereign risk. Since then practitioners and academics have worked to improve sovereign risk assessment by identifying the significant variables contributing to the probability of default and devel- oping early warning systems. The protracted process of IMF led rescheduling agreements rather than a swift bailout of the indebted countries (and associated private banks) serves as a lesson to bankers and developing countries that even though a sovereign default may undermine the stability of the world financial system, official assistance comes at a steep price. The more recent episodes of sovereign debt repayment problems underline these lessons, though political factors appear to have become more important. Suspension of interest flows on sovereign loans all too often reflects an economic/financial crisis in the country that does it. It also triggers difficulties for the creditor banks overseas. Financial crises were, however, omitted from this chapter. They can affect any country, developed or emerging, and are the subject of Chapter 8, while Chapter 7 explores the causes of individual bank failure. B ANK F AILURES 7 7.1. Introduction Bank managers, investors, policy makers and regulators share a keen interest in know- ing what causes banks to fail and in being able to predict which banks will get into difficulty. Managers often lose their jobs if their bank fails. The issue is also impor- tant for policy because failing banks may prove costly for the taxpayer; depositors and investors want to be able to identify potentially weak banks. In this chapter, the rea- sons why banks fail are explored, using both a qualitative approach and quantitative analysis. Since bank failures often lead to financial crises, the chapter also looks at their causes, undertaking a detailed examination of the South East Asian and Japanese financial crises. After defining bank failure, section 7.3 discusses a range of key bank failures, from the collapse of Overend Gurney in 1866 to the well-publicised failures such as the Bank of Credit and Commerce International and Barings bank over a century later. Based on these case studies, some qualitative lessons on the causes of bank failure are drawn in section 7.4. A review of econometric studies on bank failure is found in section 7.5, most of which use a logit model to identify the significant variables that increase or reduce the probability of a bank failing. The quantitative results are compared to the qualitative contributors. Section 7.6 concludes. 7.2. Bank Failure – Definitions Normally, the failure of a profit-maximising firm is defined as the point of insolvency, where the company’s liabilities exceed its assets, and its net worth turns negative. Unlike certain countries that default of their debt, some banks do fail and are liquidated. Recall from the discussion in Chapter 5 that the USA, with its prompt corrective action and least-cost approach, has a well-prescribed procedure in law for closing and liquidating failed banks. In other countries, notably Japan (though it is attempting to move towards a US-type approach) and some European states, relatively few insolvent banks have been closed in the post-war period, because of real or imagined concerns about the systemic aspects of bank failure. Thus, for reasons which will become apparent, most practitioners and policy makers adopt a broader definition of bank failure:abankis deemed to have ‘‘failed’’ if it is liquidated, merged with a healthy bank (or purchased and [ 352 ] M ODERN B ANKING acquired 1 ) under central government supervision/pressure, or rescued with state financial support. There is a widerange of opinions about this definition. Some think a failing bankshould be treated the same way as a failing firm in any other industry. Others claim that failure justifies government protection of the banking system, perhaps in the form of a 100% safety net, because of its potential for devastating systemic effects on an economy. In between is support for varying degrees of intervention, including deposit insurance, a policy of ambiguity as to which bank should be rescued, merging failing and healthy banks, and so on. The debate among academics is reflected in the different government policies around the world. The authorities in Japan (until very recently) and some European states subscribe to the view that virtually every problem bank should be bailed out, or merged with a healthy bank. In Britain, the tradition has been a policy of ambiguity but most observers agree the top four or five commercial banks 2 and all but the smallest banks would be bailed out. The United States has, in the past, tended to confine rescues to the largest commercial banks. However, since 1991, legislation 3 has required the authorities to adopt a ‘‘least cost’’ approach (from the standpoint of the taxpayer) to resolve bank failures, which should mean most troubled banks will be closed, unless a healthy bank is willing to engage in a takeover, including taking on the bad loan portfolio or any other problem that got the bank into trouble in the first place. There are three ways regulators can deal with the problem of failing banks. 1. Put the bank in receivership and liquidate it. Insured depositors are paid off, and assets sold. This approach is most frequent in the USA, but even there, as will be observed, some banks have been bailed out. 2. Merge a failing bank with a healthy bank. The healthy bank is often given incentives, the most common being allowing it to purchase the bank without the bad assets. Often this involves the creation of an agency which acquires the bad assets, then attempts to sell them off. See the ‘‘good bank/bad bank’’ discussion in Box 8.1 of Chapter 8. A similar type of takeover has emerged in recent years, known as purchase and acquisition (P&A). Under P&A, assets are purchased and liabilities are assumed by the acquirer. Often a state or state-run resolution pays the difference between assets or liabilities. If the P&A is partial, uninsured creditors will lose out. 3. Government intervention, ranging from emergence of lending assistance, guarantees for claims on bad assets or even nationalisation of the bank. These different forms of intervention are discussed in more detail below. The question of what causes failure will always be of interest to investors, unprotected depositors and the bank employees who lose their jobs. However, if the state intervention school of thought prevails, then identifying the determinants of bank failure is of added 1 See Table 7.1. 2 The big four: HSBC, Barclays, Royal Bank of Scotland and HBOS. Lloyds-TSB has been in fifth place (measured by asset size and tier 1 capital) since the merger of the Halifax and Bank of Scotland – HBOS. 3 This rule is part of the Federal Deposit Insurance Corporation Improvement Act, 1991 – see Chapter 4 for more detail. [ 353 ] B ANK F AILURES importance because public funds are being used to single out banks for special regulation, bail out/merge banks and protect depositors. For example, the rescue of failing American thrifts in the 1980s is estimated to have cost the US taxpayer between $250 and $300 billion. In Japan, one reason the authorities shied away from early intervention was a hostile taxpaying public. However, the use of public funds to inject capital into weak banks and nationalise others, together with the need to extend ‘‘temporary’’ 100% deposit insurance well past its ‘‘end by’’ date, had raised the cost of the bailout to an estimated 70 trillion yen ($560 billion). 4 Posen (2002) estimates the direct cost of the Japanese bailout to the year 2001 to be 15% of a year’s GDP, compared to just 3% for the US saving and loan debacle. 7.2.1. How to Deal with Failed Banks: The Controversies Most academics, politicians (representing the taxpayer), depositors, and investors accept the idea that the banking sector is different. Banks play such a critical role in the economy that they need to be singled out for more intense regulation than other sectors. The presence of asymmetric information is at the heart of the problem. A bank’s managers, owners, customers, regulators and investors have different sets of information about its financial health. Small depositors are the least likely to have information and for this reason, they are usually covered by a deposit insurance scheme, creating a moral hazard problem (see pp. 6–7 for more detail). Regulators have another information set, based on their examinations, and investors will scrutinise external audits. Managers of a bank have more information about its financial health than depositors, regulators, shareholders or auditors. The well-known principal agent problem arises because of the information wedge between managers and shareholders. Once shareholders delegate the running of a firm to managers, they have some discretion to act in their own interest rather than the owners’. Bank profits depend partly on what managers do, but also on other factors unseen by the owners. Under these conditions, the best managerial contracts owners can devise will lead to various types of inefficiency, and could even tempt managers into taking on too much risky business, either on- or off-balance sheet. However, these types of agency problems can arise in any industry. The difference in the banking sector, it is argued, is that asymmetric information, agency problems and moral hazard, taken together, can be responsible for the collapse of the financial system, a massive negative externality. Though covered in depth in Chapter 4, it is worth summarising how a bank run might commence – recall a core banking function, intermediation. Put simply, banks pay interest on deposits and lend the funds to borrowers, charging a higher rate of interest to include administration costs, a risk premium and a profit margin for the bank. All banks maintain a liquidity ratio, the ratio of liquid assets to total assets, meaning only a fraction of deposits is available to be paid out to customers at any point in time. However, there is a gap between socially optimal liquidity from a safety standpoint, and the ratio a profit-maximising bank will choose. 5 4 Sources: ‘‘Notes’’, The Financial Regulator, 4, 2000, p. 8 and The Banker, January 1999, p. 10. 5 For example, in the UK, mutually owned building societies maintain quite high liquidity ratios, in the order of about 15–20%, compared to around 10% for profit oriented banks. [...]... Resolution Cost As a % of Assets 5.7.82 6. 8.82 14.10.83 11.7. 86 24.11. 86 17.7.87 20.4.88 29.7.88 29.3.89 20.7.89 1 .6. 90 OK TX TX OK OK TX TX TX TX TX TX 4 36 437 1 410 1 754 468 1 181 12 374 21 277 15 64 1 4 66 5 1 594 14.9 0 (open bank assistance given) 37.3 9 .6 16. 9 12.7 8.9 12 18.2 21.1 13.4 TX: Texas; OK: Oklahoma Source: FDIC (1997), table 9.2 The FDIC defines a bank as large if its assets exceed $400 million... ] MODERN BANKING Table 7.2 Large Bank Failures in the South-West, 1980–90 Bank Penn Square Abilene National First National Bank of Midland First Oklahoma BancOklahoma BancTexas First City Bancorp First Republic Mcorp Texas American National Bancshares Failure Date State Assets ($m) Resolution Cost As a % of Assets 5.7.82 6. 8.82 14.10.83 11.7. 86 24.11. 86 17.7.87 20.4.88 29.7.88 29.3.89 20.7.89 1 .6. 90... banks However, the ‘‘systemic risk’’ exception in FDICIA has given the FDIC a loophole to apply too big to fail.14 14 See Chapter 5 for more detail on FDICIA [ 366 ] MODERN BANKING 7.3 .6 Johnson Matthey Bankers Johnson Matthey Bankers (JMB) is the banking arm of Johnson Matthey, dealers in gold bullion and precious metals JMB was rescued in October 1984, following an approach to the Bank of England by... (defined 6 The USA was the first country to introduce deposit insurance, in 1933 [ 3 56 ] MODERN BANKING in Chapter 4) may be seen as a way of saving the bank, and if not, providing a comfortable payoff for the unemployed managers Given the presence of contagion in the sector, such behaviour should be guarded against through effective monitoring Lack of competition will arise in a highly concentrated banking. .. originated as a discount house but by the 1850s was a prosperous financial firm, involved in banking and bill broking After changes in management in 18 56 and 1857 it began to take on bills of dubious quality, and lending with poor collateral to back the loans By 1 865 the firm was reporting losses of £3–£4 million In 1 866 , a number of speculative firms and associated contracting firms, linked to Overend Gurney... Brazil Even though these loans were non-performing, Barings granted 7 Legislation passed in 1858 allowed limited liability and Overend Gurney became a limited liability company in 1 862 8 Wood (2003), p 69 [ 360 ] MODERN BANKING additional, large loans to the governments of Argentina and Uruguay between 1888 and 1890 By the end of 1890, these loans made up three-quarters of Barings’ total loan portfolio... Source: FDIC (1998) [ 3 76 ] MODERN BANKING two other subsidiaries bankrupt.28 BNEC’s failure was the third largest, after First Republic Bank and Continental Illinois.29 On 6 January, the OCC appointed the FDIC as receiver The FDIC announced that three new ‘‘bridge banks’’ had been chartered to assume the assets and liabilities of the three insolvent banks, and they would run a normal banking business on... an individual bank to the complete collapse of a country’s banking/ financial system is rare The US (1930–33) and British (1 866 ) cases have already been discussed in some detail Proponents of special regulation of banks, and timely intervention if a bank or banks encounter difficulties, would argue that the presence of strict regulation of the banking sector has prevented any serious threats to financial... Crises, 1980–94 Between 1980 and 1994 there were 1295 thrift failures in the USA, with $62 1 billion in assets Over the same period, 161 7 banks, with $302 .6 billion in assets, ‘‘failed’’ in the sense that they were either closed, or received FDIC assistance These institutions accounted for a fifth of the assets in the banking system The failures peaked between 1988 and 1992, when a bank or thrift was, on... Trust Corporation (RTC), or received financial assistance from the FSLIC For a detailed account of the crisis, see White (1991) 16 The author’s account used two excellent publications by the Federal Deposit Insurance Corporation, FDIC (1997) and FDIC (1998) [ 368 ] MODERN BANKING and loans firms The Home Owner’s Loan Act was passed, authorising the Federal Home Loan Bank Board (FHLBB) to charter and . management in 18 56 and 1857 it began to take on bills of dubious quality, and lending with poor collateral to back the loans. By 1 865 the firm was reporting losses of £3–£4 million. In 1 866 , a number of. of an individual bank to the complete collapse of a country’s banking/ financial system is rare. The US (1930–33) and British (1 866 ) cases have already been discussed in some detail. Proponents. Gurney and Company Ltd 7 in 1 866 , and Baring Brothers in 1890. Overend Gurney originated as a discount house but by the 1850s was a prosperous financial firm, involved in banking and bill broking.