Bank Failures in Australia: Causes, Consequences and Prevention

This presentation discusses the causes, consequences and prevention of bank failures in Australia. It covers topics such as bad loans, funding issues, asset liability mismatch, issues with regulators, proprietary trading, bank runs, decisions related to risk management, inappropriate loans to bank insiders, and loopholes in the stock market. It also explains what happens when a bank fails, how customers are affected, and what the Australian government does to protect them. Finally, it provides tips on how to prevent bank failures. References are included.

A U S T R A L I A
Bank Failures

What is a bank failure?
Banking in Australia is operated by the four major banks
namely Commonwealth Bank of Australia, Westpac
Banking Corporation, Australia and New Zealand
Banking Group and national Australia Bank (Zheng,
Cheung and Cronje, 2016).
Bank failure simply means a situation in which bank fails
to operate under the regulation and is not bale to meet the
obligations of the people.
There is a lot of loss of investments and the bank is not in
a position to pay the cash when the depositors demand for
the same.
It can also be referred to as closing of a bank which

Causes of Bank Failure
The main causes of the bank failure are as follows.
 Bad Loans
 Funding Issues
 Asset Liability mismatch
 Issues with the regulators
 Proprietary Trading
 Bank Run
 Decisions related to risk management
 Inappropriate loans to bank insiders
 Loopholes in the stock market

 One of the basic reason of the bank failure is the upside down effect in the
stock market. This factor is very much dynamic in nature.
 Another way of the bank failures can be when there is a lack of supervision
from the side of the government.
 When the assets of the bank are not in association with the liabilities of the
bank.
 When the bank is involved in the activities such as money laundering or
any other kind of illegal activities the chances are that the bank may fail.
 Over the years banks have entered into the non conventional businesses to
improve the profit status of the business (Barr, Seiford and Siems, 2013).
 Many saving and bank loans which were given to the directors and the
other insiders for the purpose of the real estates and many other many
projects that were conceived illegally. Due to this kind of transactions the
bank resulted into the failure
 Rogue employees are also responsible for bringing down the banks. To
cover the losses and by pass internal controls a number of the financial
institution have been brought down significantly.

What happens when the bank fails ?
Most of the banks are ADIs insured. If the bank is not
insured the huge has been taken by the bank.
When the banks fail to operate they are being taken by the
ADIs. They may sell the bank to another bank which is
stronger or for a particular point of time they can operate
as federally owned bank
(LIM, Kanagaretnam and Lobo, 2014).
The FDIC is the regulatory body which insures the
deposits up to $250000. If the banks are keeping the
balance more than the prescribed limit the bank is at risk.

From the customers point of view if a bank fails it comes
under the category of the non-event.
Customers continue to use the cheques and the debit cards
sometime the electronic transfers.
The specific timeframe for resolving the bank failures is
not published by the FDIC.
When the banks are put to an end due to failure or
bankruptcy the money is no longer held by the weak bank
the customers can take their money by writing a cheque or
transferring the money electronically.
Sometimes the bank branches are also destroyed by the
natural calamity or terrorism. If the accounts are not
insured than the chances are most likely to cause an
inconvenience.

What happens to money ?
If the cash accumulated in the bank is large
any of the savings bank accounts and if the
customer is insured by the Australian
government it will act as a cover against the
money deposited.
The money is transferred under the
Australian government and the money is
transferred electronically to the new bank
which is strong and potential to hold on to
the losses.

What would the Australian Government do ?
The government will ensure that the customers who have
the insurance cover can transfer their money from one
bank to another bank (Wheelock and Wilson, 2012).
The new policies and the strategies are formed to regulate
the accounts which have higher amount.
The initiatives have been taken from the side of the
employee as well to check and ensure the limits and
capacity to back the loans taken by the individual or
company or partnership firm or so.

Graphical Representation
(Source: Wheelock and Wilson, 2012).

How to prevent Bank Failures
A dynamic view of capital should be taken as health of banks
depends on profits and the same can be generated in future.
 Regulator's are supposed to be alternative to franchise value
and bank should not be permitted to take excessive risks
(Cox and Wang, 2014).
Control over the regulatory expenses should be given as there
are almost certainly economies of scale in acquiescence
operations (FGDR, 2018).
A daily check on the accounts details shall be kept to ensure
that the transactions are taking place legally.

References
 FGDR, (2018) What is bank failure, [online]. Available From https://
www.garantiedesdepots.fr/fr/node/6872 [Accessed on 26th May 2018].
 Barr, R.S., Seiford, L.M. and Siems, T.F., (2013) Forecasting bank failure: a non-parametric
frontier estimation approach. Recherches Économiques de Louvain/Louvain Economic
Review, 60(4), pp.417-429.
 Wheelock, D.C. and Wilson, P.W., (2012) Explaining bank failures: Deposit insurance, regulation,
and efficiency. The Review of Economics and Statistics, pp.689-700.
 Cox, R.A. and Wang, G.W.Y. (2014). Predicting the US bank failure: A discriminant analysis.
Economic Analysis and Policy, 44(2), pp.202-211.
Chiaramonte, L., Liu, H., Poli, F. and Zhou, M (2016). How Accurately Can Z‐score Predict Bank
Failure?. Financial Markets, Institutions & Instruments, 25(5), pp.333-360.
LIM, C.Y., Kanagaretnam, K. and Lobo, G.J. (2014). How well do accounting-based risk measures
predict bank failure and bank financial trouble? Evidence from the recent financial crisis.
Zheng, C., Cheung, A. and Cronje, T (2016). Bank Liquidity, Bank Failure Risk and Bank Size. In
ECU Business Doctoral and Emerging Scholars Colloquium 2016 (p. 38).