Bank Failures Cause Crisis: How Absent Management in Banks Can Cause a Crisis

Abstract

Banking is based on trust. Trust that each bank will pay back deposits to customers and loans to other banks. If one bank loses the trust of its customers, or that of other banks, this can cause a run on the bank. Northern Rock became overly dependent on mortgage-backed securities and caused the first bank run in the United Kingdom for 150 years, because it lost the trust of the depositors who stood in queues outside the branches. When the United States housing market slowed, one of the first casualties was the unmanaged investment bank Bear Stearns, which lost the trust of the banks financing it.