Question

What are some reasons that banks fail? How can we fix these problems?

Answer 1

Banks fail when they are not able to meet their obligations. This means that they are unable to repay their liabilities or unable to repay the deposits made by the customers. Banks also fail when the market value of their assets decline below their liabilities.

These problems can be avoided by maintaining sufficient liquidity to be able to pay the customers when they demand their deposits. A bank can also avoid failure by keeping a tab on the market value of its investments and assets. The bank can also avoid failure by lending only to credit worthy borrowers and ensuring that their loans are given out only to sound borrowers. This will avoid default on the loans given out by the bank.