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International Banking Crises over the Years

man with binocularsWhen I worked in a bank in New York State during the 1990’s, I was well aware of the existence of the various other banks in the area. Customers check out a number of banks and compare features before deciding where to house their money. Of course, the bank’s fiscal security was of paramount importance but other features, such as higher interest rates, selection of investment instruments and others, played an equally significant role in the decision making.

Over the years, banks consolidated, with larger institutions gobbling up the smaller local banks and shrinking competition to a minimum. Customer service improved somewhat, offering account holders individual attention and customized bank features. With so much money in the hands of so few, banking institutions took on too many responsibilities and offered inappropriate investment and real estate opportunities to all its clients. It is no wonder that,in time, banks were unable to withstand the pressure that ensued and began to falter, causing economic catastrophes and the collapse of financial institutions country wide.

1st Bank Crisis

Bank collapses are not new to the international scene. They go as far back as the late 17th century during Holland’s tulip bubble when a single tulip bulb was able to briefly fetch six times the average wage. According to Lehman Brothers, there were 11 banking and financial crashes in the 18th century and another 18 in the 19th, the last one occurring in 1896. 33 financial storms took place in the 20th century, with the Wall Street Crash of 1929 and the Japanese financial turmoil of the 1990’staking center stage.

The American crisis of 1907 which caused the New York stock market to lose half its value and the economy to fall into recession, saw the National Bank of North America collapsing while most other banks and trust companies experienced catastrophic runs. This crisis was triggered, presumably by a decision by several New York banks to retract outstanding loans but the fever soon spread nationwide. The whole financial situation led eventually to the creation of the Federal Reserve System, America’s central bank, in 1913.

Wall Street Crash

The mother of all crashes, the Wall Street Crash of 1929, did not happen in a vacuum. It was preceded by a decade-long speculative boom that saw millions of investors jumping into the stock market with money borrowed heavily from the banks. As prices skyrocketed, the banks were only too pleased to lend investors as much as 60% of the face value of the stock shares, resulting in a classic economic bubble.

When prices started dropping on October 24th, later referred to as Black Thursday, a frantic flurry of selling ensued. Despite the trading that slowed somewhat over the next few days, the world’s foremost capital market crashed on Black Tuesday, October 29th, with investors selling a total of 16,410,030 shares. Some $14bn was wiped off the value of the New York Stock Exchange and by 1933, some 11,000 of America’s 25,000 banks had gone bust and millions of investors were ruined. Some of the big boys such as the Morgans, Rockefellers and Lehmans, stayed afloat but it took the market more than 25 years to totally recover.

BCCI

The Bank of Credit and Commerce International was closed down by the Bank of England in July 1991 after regulators found it was knee deep in fraud, tax evasion, arms trafficking and a list of other illegal activities. More than a million investors in more than 70 countries were ruined as the investigation found that the bank had mislaid over $13bn. This was a strange set of circumstances as BCCI had been set up with funds from Abu Dhabi, the Bank of America and possibly the CIA. Later reports showed that the bank had most probably been spending its customers’ deposits instead of investing them.

Baring’s, the oldest merchant bank in London, went belly-up in 1995, following losses of some £827m by one of its traders, Nick Leeson, on futures contracts. In the 1980’s, the U.S. Savings and Loan Crisis saw 1,000 of America’s 4,000S&L’s go belly-up due to risky financial investments and since the U.S. government had insured many of the individual deposits up to $1m, it ended up facing a mammoth liability when these S&L’s collapsed. The bailout amounted to $150bn.

Based on the history of the banking industry, the recent banking collapse in the U.S. will not be the last. Will anything be done to prevent it from happening again? Well, that remains to be seen.

Cina Coren is a contributing editor at DailyForex.com and a freelance blogger to several publications.

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