The 12 Causes of Bank Failures - Part 1

An annotated list of stories about what not to do in banking.

It is not always true, but it is true in enough cases to say that the typical bank fails as a result of a liquidity crisis — a bank run. Continental Illinois was seized in 1984 in the midst of a run on by international depositors. Washington Mutual was seized in 2008 after three successive runs led the FDIC to fear for the solvency of the deposit insurance fund. And Silicon Valley Bank was seized and given blanket deposit insurance coverage to satiate a run by venture capitalists.

Yet each failure is unique. Depositors lost confidence in Continental because of its $1 billion exposure to the failed Penn Square Bank. Depositors fled Washington Mutual for fear of its subprime mortgage exposure. And depositors ran on Silicon Valley after a decline in the value of its securities made it appear insolvent to folks who looked at the actual value of things, not the contrived value of things used for accounting purposes.

My point is that while the actual cause of most bank failures may be a liquidity crisis, the proximate, and preventable, cause is one step removed. It’s this second and more remote cause that explains why depositors run on a bank in the first place.

With this in mind, I curated a list of the most common causes of bank failures over the 230-year history of the United States. It comes from a document I’ve tended to for years that includes, among other things, a list of every important bank failure I’ve come across in my research.

We’ll start with a story we all know well…