Chapter 9 - Bank Crisis, Distress Syndrome, and Failure Risk Management in Developing Economies

Abstract

Bank failure has been a major problem in the evolution of the banking system in developing economies. In Nigeria, bank failure has been a recurring issue since 1930s when it was first experienced. The problem has been evident for a long time in other developing economies where regulatory authorities grapple with failed banks. Failings in risk management impact on the ease with which banks slip into crisis, become distressed, and fail. This causes concern about the future of banking in developing economies. Distress erodes shareholders’ funds which cushion banks against liquidity crisis and failure. Continued distress-induced downward spiral of fortunes of banks has wider implications for the macroeconomics of developing countries. The problem easily becomes precarious. High ratios of deposit liabilities and risk assets of distressed banks to total banking system portfolios exacerbate the problem. I analyze the situation as I investigate issues in banks failure in developing economies.