Banks are directly connected with overall economic conditions. So they reflect the health of the economy and the direction it is taking. All indicators show that the world’s economies, especially those of the Western world and Japan, are in a very serious state. Never have so many countries had such economic difficulties at the same time. French president Valery Giscard d’Estaing summed up the feelings of many. He warned that the world was in the grip of a general economic crisis and that “all the curves are leading us to catastrophe.
” (Bonin, 2003, 31) Country after country has been hit with rampant inflation, money shortages, declining real income of workers, persistent unemployment and poverty (Bonin, 2003, 21). The seeds for this condition were sown decades ago. But the situation was made much worse by the recent fourfold rise in oil prices. Now nearly every oil-importing nation has been going deeply into debt to try to pay its staggering oil bills. Thus, after several European banks closed and others, including a Swiss bank, suffered sharp losses, The Wall Street Journal said: “The system is sick.
” It added: “Not even the highly vaunted Swiss banking system is immune . So is anything really safe today? . . .(Berger, 2000, 13) “There never has been a time when so many imponderables hung over markets and over those elements which control actions of markets. . . .(Bonin, 1998, 14) “When even the biggest Swiss bank is clipped in a foreign exchange deal, then one might well ask: What’s the world coming to? Pessimists already are answering the question. ” (Berger, 2000, 41) History of Banking and the System’s Failure
THE phrase “as good as money in the bank” once meant that the investment or possession was considered to be very safe. This comparison was made because banks were regarded as very safe places to put money (Drakos, 2002, 14). But times have changed. Today many people are not so sure about the safety of the money they have in banks. And there is good reason to feel that way. The financial experts are not so sure either. (Fries, 2003, 17) The Wall Street Journal declared in a headline: “Fears About Stability of the Banking System in West Are Spreading.
” It noted that many banks in the Western industrial nations are in trouble. Their financial position has deteriorated. An increasing number of economists feel that the banks are in worse shape now than at any time since the Great Depression that began in 1929 ( Bonin, 2003, 16) . Recent bank failures have been a shock. In October 1974 the Franklin National Bank in New York was declared insolvent. It had been the nation’s twentieth-largest bank, the largest to collapse in the history of the United States. Several others closed during the year.
In Germany four banks failed, including the largest private bank, I. D. Herstatt. Some other European banks closed, while still others announced huge losses. And a growing number of banks were stretched to the limit of their resources (Masson, 2001, 13). These problems brought to mind the grim days of the Depression. At that time banks all over the world failed. In the United States about half the banks closed, 4,000 in 1933 alone. Most of these banks however never reopened. (Fries, 2003, 31) Why are so many banks troubled? Why have some of the largest failed?
For much the same reason that any business or individual fails financially. That happens when expenses grow faster than income; and when it continues too long, bankruptcy ensues. Bank expenses include such things as the interest paid out to depositors, the salaries and benefits to employees, and the cost of operating buildings. But some banks have lately added another growing cost: they have relied more on borrowing money themselves so that they could loan it out to others. But the cost (in interest payments) to the bank borrowing such money is usually high.
During 1974, in a period of recession, banks were hurt in other ways (Crystal, 41). Some made too many high-risk loans. When borrowers could not pay the loans back as scheduled, or at all, due to bad business conditions, the banks incurred losses. Also, banks that had money invested in such things as stocks and bonds suffered when these lost value. And some banks lost very heavily by speculating, and guessing wrong, on foreign money markets, where the exchange rates of currencies fluctuate in relation to one another. During the year some banks were additionally hurt by withdrawal of money by depositors.
Out of fear, or to invest in other areas that brought greater returns, money was pulled out of some banks in substantial quantities. This meant that the bank did not have that money to loan out to make a profit, and income suffered. Hence, for a variety of reasons, bank expenses have mounted. But in too many cases income has not kept pace. Resources were stretched thin. And for some banks it stretched too far, like a balloon that has been inflated too much and bursts. The startling bank problems during 1974 have officials worried.
Among the things that concern them is how so many authorities could have been caught unawares (Clarke, 1999, 31). Business Week noted: “Now there are the recriminations and the questions about how not only the banks but also the banking regulators could have made so many wrong guesses over the past 10 years. ” This business publication further commented: “Taken as a whole, the [U. S. banking] system is in more trouble today than at any time since the 1930s, with a distressing number of banks over-loaned, over-borrowed, over-diversified, and undercapitalized. . . .(Clarke, 2000, 16)