When a bank becomes unable to meet its obligations to its depositors or other creditors because of various reasons we will refer to it as bank failures. In Banking terms, banking failures occur when the banks may become insolvent or too illiquid to meet its liabilities. When we analyze bank failures in economic or market terms, we will get a clearer picture. a bank fails economically when the market value of its liabilities exceeds the market value of its assets. Such a scenario will prevent the banks from meeting the customer demands. In other words, a bank with fewer assets and more liabilities may not be able to fulfill the demands of all of its depositors on time. In such cases, it is quite possible that the failed banks may be taken over by the regulating agencies to protect the interests of its customers and the shareholders.
Banking failures are considered as a serious matter because of the complex relations banks have with other organizations. For example, a failed bank may have a .lot of individual depositors, deposits from organizations and also it may have lent a huge amount of money to thousands of individuals and organizations. Moreover, many people might have invested in the shares of the same bank. Banking failures sometimes cause problems to other organizations also. Many people believe that a single bank failure can lead towards multiple bank failures because of the interconnection between banks.
The recent financial crisis resulted in multiple bank failures not only in America but in Europe and other parts of the world as well. Lehman Brothers, Bank of America, AIG etc like big financial institutions suffered major setbacks during the recent recession. .