Why do Banks Fail?

Santonu Basu

International Review of Applied Economics, 2003, vol. 17, issue 3, 231-248

Abstract: Banks advance loans in the absence of precise knowledge in relation to the outcome of borrowers' projects. Consequently, uncertainty in relation to loan repayment emerges. Thus, banks introduce the 'credit standard' as insurance against loans, so that should borrowers' projects fail, borrowers have an alternative means of honouring their debt obligations. It is argued in this paper that in the competitive atmosphere under which this sector operates, it is not possible to secure the entire loan portfolio by introducing the credit standard, and in recent years this difficulty has been further exacerbated by financial liberalisation, which may have caused bank failures.

Date: 2003
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DOI: 10.1080/0269217032000090469

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