A bank is a business, and like other businesses, they can fail. Sometimes they fail because the people who run them make poor business decisions such as expanding too quickly or putting too much money into one type of loan.
Sometimes they fail because of fraud. Maybe the president makes questionable loans to friends or hires unqualified relatives and pays them huge salaries. But banks also go out of business because changing economic conditions make it difficult or impossible for borrowers to repay their loans. Here’s an example.
Gusher National Bank Slips on Falling Oil Prices Falling energy prices mean cheaper gasoline and lower home heating bills. So, falling oil prices must be good, right?
Not for everyone! Take the case of Gusher National Bank. Gusher was very aggressive in making loans to oil and natural gas companies that had no problem repaying their loans when energy prices were high. The loans spelled big profits for Gusher, and everyone agreed that Gusher’s executives were smart business people who really knew how to make money.
Then the economy slowed down, and the demand for energy fell. Factories burned less oil and natural gas. Truck drivers, commuters, and vacationers drove fewer miles and burned less fuel. As a result, energy prices dropped sharply, and many energy companies fell behind on their loan payments. Some even stopped making payments altogether. Months passed, oil prices remained low, and more energy companies fell
behind on their payments. Finally, Gusher lost so much money to bad loans that government regulators had to step in and close the bank. Gusher had fallen victim to changing economic conditions—falling energy prices and a high concentration of loans to energy companies.
Or take the case of Bedrock Bank . . . Bedrock Bank Gets Too Big Too Fast Bedrock Bank’s new president was determined to turn his bank into the region’s biggest lender. Bedrock’s loan officers got the message and started making as many loans as they could for condominium developments, shopping centers, office buildings, and high-priced suburban
housing developments. Loan applications were not always checked as closely as they had been in the past, and some of the loans were approved more quickly than they had been in the old days. But nobody seemed concerned because the local economy was strong and real estate values were rising rapidly.
Everything seemed fine; everyone was making money. But then the economy slowed down, and things took a turn for the worse. The weak economy forced many businesses to close, leaving lots of vacant office space. Real estate values plummeted, and many developers fell behind on their loan payments.
In the end, Bedrock Bank was losing so much money on bad real estate loans that government regulators were forced to step in and close it. The regulators tried to find a buyer for Bedrock, but no other bank wanted to get stuck with all the loans that had gone bad. Eventually, another bank agreed to buy Bedrock if the federal government would agree to keep many of the problem loans.
