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    Failure Patterns - Banks

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    anil1820
    Rapid growth without diversification often leads to bank failures. Some common failure patterns are: - High concentration of loans to one sector like infrastructure or real estate that sees boom-bust cycles. - Newly chartered banks have higher failure rates as they try to rapidly expand lending to meet shareholder expectations. - Around 30-50% of failures are due to fraud and poor management, especially when lending opportunities dry up. - Reckless lending, loose underwriting standards, and high leverage also contribute to failures, as seen with Washington Mutual's subprime lending practices.

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    Failure Patterns - Banks

    Uploaded by

    anil1820
    41 views22 pages
    Rapid growth without diversification often leads to bank failures. Some common failure patterns are: - High concentration of loans to one sector like infrastructure or real estate that sees boom-bust cycles. - Newly chartered banks have higher failure rates as they try to rapidly expand lending to meet shareholder expectations. - Around 30-50% of failures are due to fraud and poor management, especially when lending opportunities dry up. - Reckless lending, loose underwriting standards, and high leverage also contribute to failures, as seen with Washington Mutual's subprime lending practices.

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    Failure patterns_Banks

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    Rapid growth without diversification often leads to bank failures. Some common failure patterns are: - High concentration of loans to one sector like infrastructure or real estate that sees boom-bust cycles. - Newly chartered banks have higher failure rates as they try to rapidly expand lending to meet shareholder expectations. - Around 30-50% of failures are due to fraud and poor management, especially when lending opportunities dry up. - Reckless lending, loose underwriting standards, and high leverage also contribute to failures, as seen with Washington Mutual's subprime lending practices.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views22 pages

    Failure Patterns - Banks

    Uploaded by

    anil1820
    Rapid growth without diversification often leads to bank failures. Some common failure patterns are: - High concentration of loans to one sector like infrastructure or real estate that sees boom-bust cycles. - Newly chartered banks have higher failure rates as they try to rapidly expand lending to meet shareholder expectations. - Around 30-50% of failures are due to fraud and poor management, especially when lending opportunities dry up. - Reckless lending, loose underwriting standards, and high leverage also contribute to failures, as seen with Washington Mutual's subprime lending practices.

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    © All Rights Reserved
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    of 22

    Failure patterns

    Notebook: Investment diary


    Created: 31-07-2017 11:03 Updated: 04-09-2020 16:48
    Author: Anil Tulsiram
    Tags: Banking failure

    Failure patterns
    Author: Anil Tulsiram

    Failure patterns

    Rapid growth: Some Mania - huge increase in agriculture product price, real estate price , Oil prices and banks
    participated madly in it.
    No diversification.. high concentration of loans....
    wholesale lending in double digits to one sector like infra, power, commercial real estate etc
    Even failed banks had high RoA before failure... focus on nature and sources of profits....ANY CONCENTRATION IN
    SOURCE OF PROFITS....
    Failure rate was high among newly chartered banks compared to old banks...These institutions had strong incentive
    to expand loan rapidly to meet shareholders expectations...
    ~ 30 to 50% of failure of banks due to Fraud and managerial deficiencies
    When lending opportunities are reduced some managers might take risky loans....

    Screen clip
    lowest PE ratio touched 50% of S&P 500
    Screen clip

    Compilation of notes on Banking failure and its causes [All


    are compilation from various sources, headlines my
    interpretation]
    Author: Anil Tulsiram

    Same banks get in trouble repeatedly.....


    Seven deadly sins.....

    Banking failure during 1980-1994

    Various regional and sectoral recession was main reason for


    many banking failure during 1980s 1) Oil gas boom and bust
    2) commercial real estate boom and bust

    Huge fluctuation in Fx [some failed banks had FX


    borrowing]

    Increased competition due to 1) Deregulation on regional


    expansion 2) dereguation of deposit rates 3) competition
    from corporate bonds
    REgulations removed limit on 1) Real estate lending 2) One
    borrower limit lead to excessive lending to commercial real
    estate

    Geographic lending restriction were removed to reduce risk


    of geographic concentration...

    Screen clip
    Various reasons for banking failures during 1980-1994

    REgional and sectoral recession after boom and bust cycle...


    Most bank failures happened during recessions...

    Screen clip
    Asset based lending relying on collateral valued assuming
    future inflation [Just like gold loans finance during 2007-12

    Commercial real estate lending inherent risky [more so


    when construction done without confirm tenants]

    1) no equity at stake by borrower 2) Wrong appraisal of real


    estate values 3) Asset based lending rather than cash flow
    based lending.....
    Leverage not more than 10x maximum, major reason for
    failure was RECKLESS LENDING RESULTING IN HIGHER
    CREDIT COSTS....

    Unlike 2007-09 credit crisis


    Before 1 year of failure, few failed banks had RoA. 1%,
    underwriting standard more important

    Screen clip
    More new banks failed compared to old banks...

    Absence of risk based capital requirements...


    Emerging markets loans defaults...

    FEd came up with promt corrective action rules post 1994...

    Washington Mutual, retail bank failure lead by bad credit


    costs in subprime lending and low equity to absorb losses....
    Hired agents to sell loans. Even if interest payments
    delayed, fees will be recorded....

    94% of WuMu business comes from retail lending....

    Exposure to california market where house prices declined


    a lot [but home loans only 16% of assets]
    Irresponsible lending practices

    Lavish life style and big emp compensation of CEO


    Nine chief compliance officer in 7 years....

    WuMu had15x leverage under current rules maximum of 10x


    was allowed.. its losses were twice equity....
    Continental illinois failure lead by 1) high credit losses 2)
    Reliance on volatile foreign sources of funds [42%]

    Continental illinois RoA was merely 0.5% and leverage 26x...

    Be careful of averaging down when decline in share price


    lead by decline in quality of assets...

    Significant exposure to less developed country loans

    1) Little retail banking deposits 2) large dependence of short


    term commercial papers 3) once unable to raise domestic
    ST funds relied on foreign funds....

    NPAs continue to increase, increasing boosted by


    extraordinary gains...

    Rumor about bankruptcy resulted in run on bank...


    Decentralize credit approval without any internal controls..

    100% wholesale book

    42% of funds from foreign sources.....and volatile funds...

    Screen clip
    expenses were very high for a wholesale bank....

    Entire continental Peer group of 8 wholesale bank at the


    time of its bankruptcy is now PART OF JP MORGAN
    CHASE......
    Continental bank lot of OIl and gas loans of Penn square
    bank most of which went bad after oil prices crashed....

    Dhanlaxmi bank analysis mostly based on an article


    published in Mind by name " Dhanlaxmi untold story"

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