Why Do Banks Fail and What to Do About It: The Role of Risk Management, Governance, Accounting, and More

Banks play a crucial role in the global economy, yet they are vulnerable to failures that can have catastrophic effects. Key questions arise: What causes bank failures? What drives these failures? Can we avoid a banking crisis? What happens when a bank fails?

This book explores the causes, consequences, and potential prevention of banking crises. It begins by examining the fundamental roles of banks in the economic system, focusing on their intermediary functions like liquidity provision, payment management, asset transformation, and borrower oversight. The book then delves into the challenges facing the banking sector, including cyber threats, climate change, and geopolitical instabilities.

The second chapter addresses the primary risks banks face, such as liquidity, credit, market, interest rate, IT, and environmental risks, and how these contribute to banking failures. Chapter three shifts focus to financial statements, contrasting those of commercial and investment banks with non-financial companies, and discusses the impact of creative accounting in recent banking collapses.

Governance issues and their role in banking failures are the focus of chapter four, highlighting the crucial need for effective risk monitoring by bank directors. The final chapter illustrates the process of bank resolution and the evolving strategies of resolution authorities in ensuring bank stability.

Targeted at researchers, regulators, and practitioners, this book comprehensively covers the drivers of banking failures, regulatory improvement suggestions, and real-world case studies. It emphasizes the importance of banks in today’s economy, their unique risks, and the aftermath of their failure, aiming to provide a threefold contribution to understanding and managing banking crises.

Nordine Abidi was an Economist in the Monetary Policy Department at the European Central bank (ECB). He was responsible for monitoring, analysing and conducting studies on the non- bank transmission of monetary policy and on cyclical and structural developments in the financial markets that have an impact on the euro area from a monetary policy perspective. He was also in charge of the evaluation of the ECB’s corporate asset purchase programme. Since September 2019, he joined the International Monetary Fund (IMF) and worked on a variety of analytical and policy endeavours (e.g. monetary and capital market issues, policy response to the COVID-19 crisis, regional economic outlook). He obtained a Ph.D. in Economics from Toulouse School of Economics, France in 2016.

Bruno Buchetti is an Assistant Professor of Financial Accounting at the University of Padua, Italy. He also serves as an adjunct professor at Toulouse Business School (TBS), where he teaches International Corporate Governance. Previously, he worked at the European Central Bank in Frankfurt am Main, Germany, as a Supervision Analyst in the “COI - Centralized On-Site Inspections” division of the Single Supervisory Mechanism (SSM). He has also been employed at Credit Suisse AG in Zurich, Switzerland, as a bank inspector. Dr. Buchetti earned his PhD in Management & Innovation from UCSC University in Milan, Italy. He has a BSc in Economics & Business Administration and an MSc in Banking & Finance (earned with summa cum laude). During his MSc studies, he was awarded a scholarship for academic merit and participated in an exchange program at Stanford University in California, USA. He is the author of “Corporate Governance and Firm Value in Italy: How Directors and Board Members Matter” and “Corporate Governance in the Banking Sector: Theory, Supervision, ESG, and Real Banking Failures,” both published by Springer Nature in 2021 and 2022, respectively. His primary research interests center on corporate governance, financial accounting, and banking.

Samuele Crosetti is a Bank Resolution Expert at the Single Resolution Board (SRB), where he carries the ongoing tasks of resolution planning and resolvability assessment for the banks in its portfolio. Before joining the Single Resolution Board, he worked as Supervision Analyst in the European Central Bank, as part of the Joint Supervisory Team of a G-SIB and member of the ECB Brexit Task Force. Alongside his main professional activity, Samuele Crosetti is a PhD candidate at Maastricht University, where is conducting research on the impact of resolution regimes and their operationalisation on financial and non-financial crisis resilience of banks. Since 2017 he has been pro bono teaching assistant of Public Economic Law at LUISS University in Rome.

Ixart Miquel-Flores is a doctoral candidate in the Finance Department at Frankfurt School of Finance & Management. He has as well been a visiting Ph.D. student to the finance departments in The University of Virginia Darden School of Business, as well as The University of Chicago Booth School of Business. He uses modern applied econometric methods to understand the effects and consequences of monetary policy, financial regulation and new technologies on the banking sector and other macro-financial stability issues. He is focused on producing policy-relevant studies. His research has been the focus of articles in reputable newspapers such as the Financial Times and Les E ́chos, as well as blogs such as Quantpedia and the Oxford University Business Law Blog. Ixart works at the European Central Bank (ECB), where he has acquired experience in different fields such as Monetary Policy and Banking Supervision (Crisis Management, Market Risk and Valuation Banking Inspections, Quantitative Risk Analysis in the context of Market Risk Stress Testing as well as Banking Cyber Resilience Stress Testing). He is a member of the European Banking Institute Young Researchers Group, and has obtained the 2018 Best Paper Award by the European Capital Markets Institute and the 2018 Young Economist Best Academic Paper Award, by the Unicredit Foundation. You can visit his website at: www.ixartmiquel.com