Bank Failure Case Study Example | Topics and Well Written Essays - 1750 words

Bank Failure - Case Study Example This however, also led to the fact that banks and other financial institutions started to take on more liberty due to this financial liberalization. The removal of restrictions on capital flows allowed banks to invest into cross border projects thus assuming more risks but also allowed them to indulge into banking practices which were more risky for the overall health of the financial institutions. The subprime mortgage market failure however, forced many experts including Prof. Susan M Wachter to conclude that the subprime mortgage failure will be much worse than the expectations held by most of the market participants. (Knowledge@Wharton). Evidence indicate that the literature comprehensively provided an insight into what may actually happen due to the lending policies adapted by the banks and other financial institutions and as such if such practices continue, it may be difficult for the financial system to sustain the increasing pressures from speculative activities in which banks and financial institutions have engaged themselves into. ... ning for the developing countries however, the current financial crisis and resulting insolvencies of banks like Lehman Brothers is an ample example of how the financial system of developed world can bear the heavy cost of bank insolvencies also. This paper will discuss some of the evidence and predictions that were presented in the literature published prior to the crises and will specially focus on literature published prior to 2003. Bank Failure Caprio G & Klingbiel D (1996) is of the view that the bank insolvencies have increased since 1970s and as such the losses are significant as compared to the losses that were incurred due to such bank insolvencies prior to such episodes. What is however, significant to note that such bank insolvencies clearly indicate the misallocation of resources as banks failed to identify and book profitable projects which can self generate the cash flows to repay the loans taken against them. (Caprio and Klingebiel). This analysis captures the real practices of the banks which continued in the 21st century also where banks continue to lend into those areas which were significantly more risky hence more deterimental to the overall health of the financial system. The lending into subprime mortgage market is just one example of imprudent lending practices adapted by the banks in order to achieve higher profitability targets with a very limited and short term horizon. What is also significant to understand that there was a systematic shift towards achieving the short term results as compared to ensuring long term insolvency of the banking institutions. Another analysis by Caprio G & Klingbiel D (1996) indicating that the worst affected of the crises would be Japan and other developing countries such as Argentine and Chile. (Caprio and