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Why do Banks Fail?

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  • Santonu Basu

Abstract

Banks advance loans in the absence of precise knowledge in relation to the outcome of borrowers' projects. Consequently, uncertainty in relation to loan repayment emerges. Thus, banks introduce the 'credit standard' as insurance against loans, so that should borrowers' projects fail, borrowers have an alternative means of honouring their debt obligations. It is argued in this paper that in the competitive atmosphere under which this sector operates, it is not possible to secure the entire loan portfolio by introducing the credit standard, and in recent years this difficulty has been further exacerbated by financial liberalisation, which may have caused bank failures.

Suggested Citation

  • Santonu Basu, 2003. "Why do Banks Fail?," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(3), pages 231-248.
  • Handle: RePEc:taf:irapec:v:17:y:2003:i:3:p:231-248
    DOI: 10.1080/0269217032000090469
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    References listed on IDEAS

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    Cited by:

    1. Bhaumik, Sumon Kumar & Piesse, Jenifer, 2008. "Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector," Economic Systems, Elsevier, vol. 32(2), pages 177-196, June.
    2. Arestis, Philip & Basu, Santonu, 2004. "Financial globalisation and regulation," Research in International Business and Finance, Elsevier, vol. 18(2), pages 129-140, June.
    3. Santonu Basu, 2006. "Structural Problems in Financing Development: Issues Relating to India," International Review of Applied Economics, Taylor & Francis Journals, vol. 20(1), pages 85-101.

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