What is Cryptocurrency A new word emerged in our lives two months after the beginning of the recession of 2008 and gradually transformed from a vague expression ("virtual coin") to the vocabulary used to characterize the new economy. On June 9, 2009 the first bitcoin was released by an anonymous person called Satoshi Nakamoto. For different reasons like the sub-prime crisis, Nakamoto, claimed he is a Japanese man in his 30's, said he gave the open protocol in 2007. Today the new coin is called a "Digital Asset" and decentralization is the principal idea behind it: there's no main institution responsible for regulating it. The most familiar and traded form of Blockchain's technology, Bitcoin, who has crossed the $15,000 lines way back and has shows an image of exponential increase in the past few months. The great advantage of blockchain technology is that it doesn't have to keep records for a large central computer or big managing company. With this ...
How Bank Fails ?
A bank failure is the closing of a bust bank by government or regulator. Bank failure is common, and lots of bank go bankrupt every year. But when major banks go bankrupt it causes a massive economic trouble for nation or maybe to the world.
But, how do banks fail in the first place?
When a person deposits money into the bank, the bank has a legal authority to use that money for them, this authority is given to them by depositor when he/she opens an account in bank.
By following the regulations of Central bank, commercial banks keep the 10% of that money in cash to keep the cash flow smooth and remaining 90% of deposited money is used by banks to buy assets or provide loans.
Now, there are 3 ways bank may go broke:
• Loan failure
• Derivates and trade
• People demand their money back
Loan Failure
When banks give out loans to people or institutions, they take a bet. The bet is weather the borrower will be able to pay back the debt. It’s a very well calculated risk and were assets, history and taxation history of borrower is examined. If all goes fine the borrower gets money from the bank.
When banks lend, they need a guarantee that if borrower fails to pay back, in exchange they can take over assets of borrower. For example, if a person borrowed money from bank to buy a house and fails to pay back, then bank has the authority to sell that person’s house to recover their money.
Now what may happen, if due to external condition, value of the asset may fall below the amount of money which is led by bank to borrower, and in these circumstances, borrower fails to pay the debt and declares bankrupt.
Due to this, banks fall into negative equity territory and is not able to pay the depositors their money. This way bank fails, to protect the depositor’s money central bank have to buy the bad assets from defaulted bank or the bank is merged into some other bank to bear the losses.
Fail trades and bad assets
The money deposited by depositor is not used completely by banks for lending. Most of that money is used to buy assets and invest into derivatives and stock market.
Derivates- (derivates is a financial instrument where it derives its value from an underlying asset) and stock market helps bank to earn a lot of profit. But same thing can happen here as well, if invested amount or derivative falls, bank loses a huge chunk of money. This scenario creates a deficit for bank where they are unable to pay the depositor back.
Depositors
Even when everything is fine for bank where its investments are safe and assets are protected, still banks may fail. Recently, the percent of failure due to this reason is very less.
Few years back, when banks didn’t have the authority to generate their own money digitally, banks have to keep 10% of cash of depositors in case they want it back.
If depositor due to some external situation like pandemic, emergency, or any other condition, feels that keeping money in bank is not safe and tries to withdraw, if many people starts this trend, the bank simply doesn’t have the money to give it back as it is locked in assets or is invested somewhere or is give out as debt.
During, time like this bank is forced to sell its assets and investment where it takes more risk. Because if assets and investment are sold to pay depositors their money the simply banks don’t have any guarantee against the borrowers. In this was bank may run off.
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