The Federal Reserve Bank of St. Louis identifies the four factors that influence the failure of a bank as:
- improper balance of risk and return;
- insufficient diversification of investment;
- management’s lack of understanding about products and services offered; and
- inadequate management of risk.
While fact situations may differ, the significant roots of bank failure can be traced back to these factors.
It is vital for bank management to stay educated regarding the causes of financial instability, in order to strengthen their bank’s infrastructure. They cannot rely on rating agencies, brokers or other financial agents to be their source of knowledge.
first tuesday take: Educational pointers for lenders do nothing, unless they become government regulation, setting guidelines and fences beyond which lenders cannot go.
Lenders are managed by people, and people (fueled by an innate drive for dominance) will do anything to get an advantage over their competition. It is this ruthless appetite for success that needs adult supervision, which of course requires the government to set a level, well defined playing field.
We will see if Congress and the present administration have the foresight to use this window of opportunity now available in this financial crisis to re-regulate lending conditions. If they don’t, expect another more dramatic ride on the credit and home sale rollercoaster we have been riding when the economy recovers.
Re: “St. Louis Fed Analysis: Bank Failures Linked to Just Four Factors,” from The Federal Reserve Bank of Saint Louis.
