Most bank failures don’t make prime time news, though when they do, it’s usually bad news for everyone else. Some of the largest financial crashes in history were triggered by the collapse of major banks and other financial institutions, caused by factors like risky lending practices, bad assets, and lack of government regulation.
10. Bank Of Credit And Commerce International
The Bank of Credit and Commerce International – or BCCI – was a Luxembourg-based institution, founded in 1972 by a Pakistani financier called Agha Hasan Abedi. BCCI gained a reputation for its innovative and flexible financial solutions – especially in the developing world – as it quickly grew to be the seventh largest private bank in the world. By the 1980s, BCCI operated in 78 countries, with assets totaling over $20 billion.
By the late 1980s, however, reports of financial irregularities at the bank started to make global headlines, as investigations by regulators in several countries uncovered evidence of money laundering, bribery, and fraud. In 1991, BCCI was shut down by regulators in the UK and the US, with all of its assets frozen. During the proceedings, it was revealed that the bank was directly or indirectly involved in a range of criminal activities, including support for terrorist organizations, dictators, and drug traffickers. The collapse of BCCI resulted in billions of dollars in losses for investors and creditors around the world, along with a general loss in confidence in the global banking system.
9. Bank Of New England
The Bank of New England was a large regional bank based in Boston, as well as one of the oldest financial institutions in the United States. Prior to its collapse in 1991, the bank had been profitable and successful in the region, with assets totaling over $22 billion at the time of its failure. As it was later found out, the bank’s success was largely built on a foundation of risky loans and questionable lending practices, eventually leading to its downfall.
In the late 1980s, the real estate market in New England had already begun to decline, as many of the bank’s loans to local developers and real estate investors went into default. As losses mounted, the bank and its subsidiaries were unable to raise sufficient capital to cover the liabilities, and were ultimately forced to declare bankruptcy in 1991.
The collapse of the Bank of New England was one of the largest bank failures in U.S. history, as it affected small businesses and job opportunities across northeast USA.
8. Colonial Bank
Colonial Bank was a regional bank headquartered in Montgomery, Alabama, with branches throughout the southeastern United States. It was founded in 1981 and grew rapidly after a series of acquisitions and mergers. By 2009, the bank had more than 340 branches and $25 billion in assets.
Like many other financial institutions at the time, Colonial Bank had significant exposure to the stressed subprime mortgage market, with a number of loans to borrowers with poor credit histories on its sheets. Many of these loans were bundled together into complex securities that were sold to investors around the world, ultimately causing the financial crash of 2008. As the housing market began to collapse, most of these loans defaulted and left Colonial Bank with major losses.
In August 2009, Colonial Bank was seized by regulators, and all of its assets – totaling about $22 billion – were sold to BB&T Corp.
MCorp was a bank holding company based in Texas. Intended to be a strong regional bank competing with larger national institutions, it quickly grew to become one of the largest banks in Texas, with over $18 billion in assets at the time of its failure.
The primary cause of MCorp’s collapse was its over-reliance on the oil and gas industry, as the company had invested heavily in the energy sector during the 1980s. When the oil market crashed in the mid-1980s, MCorp was left with high losses on its balance sheet, combined with excessive debt to finance its earlier expansion. The bank increasingly found itself unable to service its debt obligations, and was eventually shut down in March, 1989. The collapse of MCorp had many repercussions for the Texan economy, along with a heavy bill for the FDIC to repay their insurers and depositors.
6. Herstatt Bank
Herstatt Bank was established in 1956 as a small, privately-owned bank in Cologne, Germany. It was initially focused on foreign exchange trading and quickly became known around the world for its expertise in the field. In the 1970s, though, the bank started to diversify its activities, including lending to other banks and trading in speculative investments.
The collapse of Herstatt Bank happened in June 1974, when it was unable to meet its liabilities due to being exposed to significant foreign exchange risk. It was eventually declared insolvent, and the German banking authorities stepped in to liquidate all of the institution’s assets.
The collapse of Herstatt Bank led to a few repercussions for the financial world, as many of its counterparties were left with substantial losses. There was also a widespread loss of confidence in the stability of the system, directly leading to the formation of the Basel Committee on Banking Supervision.
5. Hokkaido Takushoku
Hokkaido Takushoku Bank was a Japanese bank founded in 1900 for the development of the Hokkaido region. It would play a major role in the economic development of the island, funding many of its earliest infrastructure and agriculture projects.
In the late 1980s, though, HTB began to expand aggressively, as it heavily invested in Japan’s real estate and speculative finance sector. At the time, the country was going through an economic bubble and most banks were eager to finance large-scale construction projects. The bubble burst by the early 1990s, though, plunging Japan’s markets into a financial crisis. The value of HTB’s assets plummeted overnight, combined with allegations of fraud, mismanagement, and embezzlement by top officials at the bank.
The Japanese government intervened in November, 1997, when it placed HTB directly under state control and bailed out its depositors. The bank’s total assets were valued at around $80 billion at the time of its collapse, along with about $7.5 billion in bad loans.
4. Continental Illinois
Continental Illinois National Bank and Trust Company was founded in 1910 in Chicago, Illinois as a small bank serving the local community. By the 1980s, it grew through mergers and acquisitions to become the seventh-largest commercial bank in the United States, right before its collapse in 1984.
The bank’s troubles began in the late 1970s, when it started to focus on commercial real estate lending to boost the overall profitability of its portfolio. The bank’s management excessively invested in risky real estate projects, resulting in huge losses during the 1980s real estate crash and global oil crisis.
The collapse of Continental Illinois was one of the largest bank failures in US history, as it had assets worth $40 billion at the time of its fall. It was also a significant blow to the US banking system, as the crash threatened to destabilize the entire financial sector. The government had to eventually step in to prevent a wider crisis, bailing out the bank with a $4.5 billion loan and taking over its ownership.
IndyMac Bank was founded in 1985 by Angelo Mozilo and David Loeb, who also founded one of America’s largest mortgage lenders, Countrywide Financial Corp. The bank became known for its aggressive lending practices, like offering low-cost mortgages to borrowers with poor credit histories. These high-risk loans, combined with the larger financial crisis of 2008, led to its closure by the Office of Thrift Supervision on July 11, 2008.
IndyMac was easily the largest mortgage lender to collapse during the housing crisis, triggering the failure of multiple other institutions in the wider savings and loans market. After the Federal Deposit Insurance Corporation, or FDIC, took control of it in July 2008, all of its assets – valued at about $32 billion at the time of the collapse – were subsequently sold to OneWest Bank.
Credit-Anstalt was an Austrian bank founded by the Rothschild family in 1855, though it was nationalized after the Second World War. It played a major role in the development of Austria’s industrial and financial sectors, and by the early 21th century, it had become one of the largest banks in Europe.
That would last until about the late 1920s, thanks to a combination of factors like the global economic downturn, the Austrian government’s economic policies, and the bank’s own risky lending practices. Credit-Anstalt had heavily invested in Austrian infrastructure during the early-1920s boom, though it had been unable to pay back its debts during the Great Depression.
The bank collapsed in May 1931, triggering a bank run by its depositors across Austria. Many historians consider it to be the beginning of the Great Depression, as the failure had a domino effect on the European banking system and led to a wave of bank failures and financial crises in Austria and other European countries.
1. Washington Mutual
By the end of 2007, Washington Mutual was easily one of the largest financial institutions in the United States, with over 2,200 branches across the country and about $183 billion in customer deposits. Throughout the early and mid-2000s, Washington Mutual aggressively issued high-risk mortgage loans to borrowers with poor credit history, which was essentially the underlying cause of the entire 2008 crisis. By the end of 2008, Washington Mutual had gone bankrupt after closing down in what we now know as the largest bank closure in history.
The federal government seized control of the bank in September, 2008, selling its assets to JP Morgan Chase for $1.9 billion. The collapse would have a huge impact on investor confidence in the larger market at that time, as the bank held assets worth $307 billion at the time of its collapse. The failure of Washington Mutual and other major institutions during the 2008 crisis led to the passing of the Dodd-Frank Act in 2010.