CAUSES OF BANK FAILURE

1. CAUSES OF BANK FAILURE

2. BNK 701BANK FAILURESWEEK 4 LECTURE 5

3. CAUSES OF BANK FAILURE- Another research Loan losses has been the most important reason of failure in all sizes of banks (57% to 86%). Insider loans that were made for personal gain of bank officers, accounted for 31% to 67% of the failures. Liquidity accounted for 35% to 57% of failures. Interest sensitivity accounted for 48% of large bank failures.

4. CAUSES OF BANK FAILURE- Another research (cont’d) Cause of failure Small Large Loans 83% 86% Insider loans 31% 33% Rate sensitivity 14% 48% Liquidity 35% 57% Causes are shown as a percentage of the number of failures for each size group.

5. CAUSES OF BANK FAILURE POOR ASSET QUALITY FACTORS

6. CAUSES OF BANK FAILURE POOR ASSET QUALITY FACTORS (cont’d)

7. TWENTY COMMON REASONS FOR LOAN LOSSES

8. TWENTY COMMON REASONS FOR LOAN LOSSES (cont’d) 7.Not analyzing borrower’s cash flows and repayment capacity. 8.Failure of officer to review loan’s status frequently enough. 9.Funds not used as represented; diverted to borrower’s personal use (no attempt to verify the purpose for which the money was applied). 10.Funds used out of the bank’s market area; poor communications with borrowers.

9. TWENTY COMMON REASONS FOR LOAN LOSSES (cont’d) 11. Repayment plan not clear or not stated on the face of the note. 12. Failure to receive or infrequent receipt of borrower’s financial statements. 13. Failure to realize on collateral because borrower raised nuisance legal defenses. 14. Bank’s failure to follow its own written policies and procedures. 15. Bank president too dominant in pushing through loan approvals.

10. TWENTY COMMON REASONS FOR LOAN LOSSES (cont’d) 16. Ignoring overdraft situation as a tip-off to borrower’s major financial problems. 17. Failure to inspect borrower’s business premises. 18. Lending against fictitious book net worth of business, with no audit or verification of borrower’s financial statement. 19. Failure to get or ignoring negative credit bureau reports or other credit references. 20. Failure to call loan or to move against collateral quickly when deterioration becomes obviously hopeless.

11. BANK FINANCIAL RATIOS AS INDICATORS OF FAILURE

13. Behavior of Bank Financial Ratios as Failure Indicators.

14. Financial Ratios of Failed Banks.

15. Financial Ratios of Failed Banks

16. CAMEL RATINGS

17. RISK INDEX

19. Monitoring Of Bank Financial Condition: EWSs to Identify Banks About to Fail

21. EWS Financial Ratios(cont’d)

22. EWS Financial Ratios(cont’d)

23. Estimating the Probability of Insolvency

24. PUBLIC CONFIDENCE MODEL

25. PUBLIC CONFIDENCE MODEL(cont’d)

26. Non-Financial Information Indicators of Financial Condition and Quality of Management

27. Non-Financial Information Indicators of Financial Condition and Quality of Management (cont’d)

28. MANAGEMENT FACTOR

29. The mismanagement leading to a bank’s failure can be caused by any or a combination of the following factors:

30. The mismanagement leading to a bank failures can be caused by any or a combination or the following factors(cont’d):

31. REGULATION

32. SUPERVISION FACTOR

33. SUPERVISION FACTOR(cont’d)

34. Bank Examination Process

35. It covers the following activities:

36. It covers the following activities (cont’d):

37. Central Banking remedial measures to deal with the problems of a failing bank.

38. Central Banking remedial measures to deal with the problem of failing bank (cont’d).