Presented by Monocle

Why Banks Fail – Key insights from an industry insider 

 ·14 Nov 2023

by David Buckham

When I graduated from university in the 1990s, investment banking was the most exciting career choice on offer.

Having studied mathematics rather than finance, I forged an untraditional path to banking and secured work as an equity trader at a small investment bank in Cape Town.

However, just a year into my chosen career, the optimism with which I viewed the industry was soured somewhat by the failure of Saambou in 2002, which subsequently triggered the failure of other banks, including the investment bank where I was working.

In what became known as the A2 Banking Crisis, 22 South African banks ultimately failed. At the time, it struck me as unusual that such a large proportion of our banks could collapse so suddenly – surely, this could not have been a purely random event.

It was at around that same time that I founded Monocle Solutions, a South African-headquartered international management consulting firm specialising in banking and insurance.

A few years later, the 2007/08 Global Financial Crisis hit, during which a staggering 11% of the 1 000 largest banks in the world collapsed.

Given that our clients were predominantly international at this time, we witnessed firsthand the devastation of this event. Within months, four major clients of ours, dispersed around the world, had defaulted or failed.

In the wake of the Crisis, it was argued that with stricter regulation in banking, failures would be prevented in the future.

But, since then, there have been numerous and continuous banking failures across the globe. In South Africa, these include the failure of African Bank and VBS, and the deregistration of Mercantile Bank.

In America, the high-profile failure of Silicon Valley Bank – four times larger than the biggest bank in Africa at the time – as well as the collapse of First Republic and Signature Bank in early 2023 were preceded by more than 560 bank failures since the turn of the century.

In Europe, the alarm bells sounded particularly loudly with the collapse of Credit Suisse, a 167-year-old “systemically important financial institution” ostensibly considered too big to fail.

In a world where banks are perceived as unshakeable fortresses, these failures have highlighted a worrying truth that lies just beneath the surface: banks are far more fragile and fail far more frequently than we choose to believe.

A country’s banking system is the brain that is meant to direct capital and liquidity as efficiently as possible to the body economic, ideally to continually improve the fundamental socioeconomic conditions of society.

This has always been the underlying reason for my fascination with banking. But at the heart of banking lies a paradox.

Although banking has attempted to maintain the illusion of stability and staid austerity, it is by its very nature inherently risky.

While there are always third-party causes and externalities that influence bank failures, the fundamental reason why banks collapse is because their business model requires them to replenish liquidity frequently, if not daily.

And because of this, banking is an industry that relies on public trust more so than any other. Over the past few decades, however, there has been an accelerated erosion of trust in financial institutions, in financial regulators, in money, and in the global financial ecosystem as a whole.

The glorification of hyper-capitalism is partly to blame for this, but so too are the problems inherent in central banking.

My latest book, Why Banks Fail: Unrelenting Bank Runs, The Conundrum of Central Banking, and South Africa’s Place in the Global Order (2023), sheds light on how this trust has been eroded and offers suggestions on what can be done to ensure the future stability of the international banking system, while also contemplating the role of South Africa and its banks in a rapidly shifting geopolitical landscape.

You can get your copy of Why Banks Fail from Exclusive Books here, or you can buy the eBook from Amazon here.

David Buckham is the CEO and founder of Monocle Solutions, an independent, results-focused management consulting firm specialising in banking and insurance.

Since its establishment in 2002, Monocle has successfully implemented a broad range of critical change projects at industry-leading banks and insurers around the world – including in the UK, Europe, Scandinavia, Asia, South Africa, and throughout sub-Saharan Africa.

Click here to find out more about Monocle.

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