Why are Bank Failures Special? Lessons from U.S. Financial History
Networks Financial Institute Working Paper No. 2008-WP-04
25 Pages Posted: 9 Apr 2008
Date Written: April 2008
In the U.S., corporate bankruptcies generally go through the court system for resolution, whereas bank failures are resolved by bank regulatory agencies. The goal of corporate bankruptcy is to maximize the value of the firm as a "going concern" in liquidation to the shareholders. In a bank failure, the goal is to minimize the loss to the FDIC. The treatment of bank failures is attributed to their "special" nature that is related to their role in providing a convenient means of payment and the provisioning of credit. Additionally, the presumed contagious nature of bank failures is often cited as something that exacerbates macroeconomic problems. Though the United States is not alone in the world in its special treatment of bank failures, it does differ from many countries, most notably the United Kingdom. Since the United States is widely regarded as having an efficient financial system that has aided economic growth, this raises the question of whether there are lessons to be learned from the United States financial history. I argue that the evolution of banking in the United States was unique in that for most of its early history state chartered banks provided currency, early bank failures influenced liability insurance programs, and the role of private or unchartered banking was not important prior to the Civil War. This unique history explains why the United States evolved in the manner it did, and why the system in the United States may not necessarily be the best policy recommendation for other countries.
Keywords: Bankruptcy, bank failures, U.S. financial history, financial institutions
JEL Classification: N21, G21
Suggested Citation: Suggested Citation