The idea of banks closing can be unsettling. Though uncommon, it’s important to understand why banks fail and how to safeguard your finances. This article examines six key reasons for bank failures, offers preparation tips in case your bank closes, and suggests strategies for those with multiple accounts at the same bank. We’ll also share real-life examples to highlight the risks.
Reasons Why Banks Fail
Bank failures can be attributed to various factors, and a combination of these often leads to the collapse of financial institutions. The following are major reasons why banks supposedly fail.
Insolvency
This is perhaps the most common reason for bank failures, as liabilities eclipse the value of existing assets. In other words, it owes more money than it owns, making it unable to meet its obligations to depositors and creditors.
Liquidity Issues
While not the same as insolvency, liquidity problems can lead to bank failures. A bank may have adequate assets but may struggle to convert them into cash to meet short-term obligations. If depositors panic and initiate a bank run, it can worsen liquidity problems.
Poor Management
Incompetent or reckless management can drive a bank into the ground. Mismanagement can result in poor lending decisions, risky investments, or inadequate risk assessment.
Economic Downturn
A severe economic downturn, such as a recession, can impact the financial health of banks. Defaults on loans and investments can erode a bank’s capital and lead to failure.
Regulatory Violations
Failure to comply with banking regulations and laws can lead to sanctions, loss of reputation, and ultimately, the collapse of a bank.
External Shocks
Events beyond a bank’s control, such as a global financial crisis or a pandemic, can severely affect the stability of the banking system and trigger bank failures.
Preparing for a Bank Closure
While the chances of a bank closure are relatively low, it’s essential to be prepared for such an event to protect your financial well-being. Here’s how you can get ready:
Spread Your Accounts
Avoid keeping all your accounts with a single bank. Diversify your accounts across multiple institutions. This way, if one bank fails, the impact on your overall finances will be minimised.
Stay Informed
Keep on the lookout for the most important updates about your bank’s financial status. Regularly review your bank’s financial statements, ratings, and news related to its stability.
Consider Deposit Insurance
In Australia, the Financial Claims Scheme (FCS) guarantees deposits of up to $250,000 per account holder per financial institution. Ensure that your accounts are within these limits to take advantage of the FCS.
Alternative Banking Options
Familiarise yourself with alternative banking options. This might include other banks, credit unions, or neobanks. Research their products and services as potential alternatives.
Updated Records
Keep accurate records of your accounts, transactions, and contact details for your bank’s customer service. In the event of a bank closure, these records will be invaluable.
Contingency for Multiple Accounts in the Same Bank
If you have multiple accounts in the same bank and are concerned about a possible bank closure, consider these contingency measures:
Review Account Ownership
Ensure that your accounts are correctly structured, particularly if you have joint accounts. The ownership structure can affect how the FCS covers your deposits.
Monitor Account Activity
Stay vigilant about the activity on your accounts. If you notice any irregularities or signs of financial distress in your bank, take action promptly.
Contact Your Bank
If you suspect that your bank is facing difficulties, communicate with your bank’s customer service. They may provide information about the bank’s financial status and what to expect.
Withdraw Funds as Necessary
If you’re concerned about the stability of your bank, you can withdraw funds as needed to ensure your deposits remain within the FCS limits.
Transfer to Another Institution
If you decide to move your accounts to another institution, research your options and initiate the transfer process. Be prepared for possible delays during the transfer.
Real-Life Examples of Bank Failures
Great Depression (1930s)
The Great Depression saw a wave of bank failures worldwide, triggered by the US stock market crash of 1929. The economic collapse led to widespread insolvency and liquidity issues, resulting in the closure of thousands of banks. Australia itself was hit hard by the crisis, with unemployment rates reaching as much as 30 per cent by 1932, but started to recover by 1935 – only after serious political crises.
Global Financial Crisis (2007-2008)
The global financial crisis, triggered by the subprime mortgage crisis in the US, led to the failure of major financial institutions such as Lehman Brothers. Governments intervened to prevent the collapse of other major banks through bailouts and regulatory reforms.
Cyprus Banking Crisis (2013)
Cyprus faced a severe banking crisis, leading to the closure of one of the country’s major banks. Depositors with significant accounts experienced a significant loss of funds. The EU and the IMF were forced to step in with a major bailout fund in 2013.
Bank of Credit and Commerce International (BCCI)
BCCI, once one of the largest banks globally, faced allegations of money laundering and fraud. It was eventually shut down in 1991, causing significant financial losses to depositors.
Can Australian Banks Close Down?
In light of the above, some people may still ask, can banks in Australia actually shutter their doors permanently? Stranger things may have happened.
In early 2023, the AICD started monitoring the finance markets in the US after Silicon Valley Bank closed down, in part due to declining tech investments and lower value of US Treasury bonds. Former APRA chairman Wayne Byres GAICD said there was bound to be shockwaves with SVB’s closure, but Australia had insulation measures in place.
In October 2023, AreaSearch noted that at least 450 bank branches in regional Australia are in danger of closing down because of smaller population density to the tune of 2,500 residents each branch. At particular danger were bank branches in areas with at least 10,000 people – and the closest branch in their reach was over 100km away. A mapping analysis provided by PSMA, for example, showed four branches covering the entirety of Goldfields, WA, three branches active in Far North Queensland, and only one each in, among others, East Arnhem and Litchfield, NT, and Tasmania’s Central Highlands. The report was based on branch map evaluations of 27 banks all over Australia (except Bank@Post), covering 3,197 outlets.
WA residents are also being hit hard, as Commonwealth Bank subsidiary Bankwest announced in March 2024 a closure of all its 60 branches in the state and transition into a purely digital bank. Fifteen of those physical branches will be rebranded as CBA outlets. Bankwest officials explained that while the company has over 500,000 customers in WA, less than two per cent are regular customers.
The heads of the four main banks – Commonwealth Bank, Westpac, NAB, and ANZ – were also forced to explain in Parliament in September 2023 why they have closed down 1,600 regional and rural Australia branches in the past several years.
Their submissions led to the Senate Standing Committees on Rural and Regional Affairs and Transport completing a new report in May 2024 that put in a spate of recommendations. They include the establishment of a publicly-owned national bank and to form a Banking Code of Conduct/Customer Service Code that will govern a formal bank closure process.
Conclusion
While bank closures are relatively rare, understanding the potential reasons behind such events and preparing for them is a responsible financial practice. Spreading your accounts across multiple institutions, staying informed, and being aware of deposit insurance limits can help safeguard your finances. In the unlikely event of a bank closure, it’s essential to remain calm, communicate with your bank, and consider alternative banking options to ensure your financial stability.
DISCLAIMER: This article is for informational purposes only and is not meant to be considered official financial advice. QUICKLE is not connected with any bank.
