03 Nov Review the two articles about bank failures and bank diversification that are found below this. Economic history assures us that the health of the banking industry is directly related to

Classmate 1: When a bank is unable to fulfill its obligations to its depositors and creditors, it is considered to be insolvent. Additionally, it can occur when the belongings' market value decreases significantly in comparison to the accountability's market value. If the collapsed bank is unable to arrange funds from the solvent bank, the depositors of the collapsed bank will become incensed and attempt to withdraw their funds as soon as possible. Additionally, the collapsed bank will sell their belongings at a significantly lower price than their market value in order to obtain liquid funds for the urgently deposited individuals. (McLeay, Michael; 2016) As a result, the bank won't be able to meet the requirements of depositors.

— One way to assign the fund in a way that reduces its exposure to particular assets or risks is through bank diversification. Diversifying by investing in a variety of assets to reduce risk is the most common strategy. And if the cost of the belongings hasn't changed perfectly, a larger portfolio will often have lower volatility than its least volatile component and a lower difference than the calculated average difference of its belongings. Furthermore, diversification is unquestionably one strategy for mitigating investment risk.

— Everyone is trying to save more money and has stopped buying cash from their homes and cars. The bank has faced a significant challenge as a result, as they have lost a significant portion of their loan profits. In addition, the bank has experienced a severe economic downturn over the past seven years as a result of a large number of customers who are not appropriately repaying either the loan amount or the loan interest, resulting in substantial losses for the bank.

— Additionally, during the recession, the bank will make a favorable offer to reduce their current interest rate by a small amount, attracting a greater number of borrowers ready to take out new loans. Because the government is attempting to encourage economic growth through policy divergence, taxes and government payouts will also differ significantly.

Classmate 2:

 Diversification, on the other hand, ensures that a bank's risk is not concentrated in any one industry, so that the negative impact of downturns in a sector is reduced on the bank, thereby lowering the likelihood of the bank collapsing into bankruptcy. Diversification, therefore, is about the risk-financing of risk-taking activities to boost the return of the institution. An important issue in credit risk management is deciding whether the risks are related to the activity or the organization. Banks tend to be concentrated in a few large industries. They invest heavily in short-term borrowing and in emerging market bonds and equity securities. To diversify their risk, they have developed sophisticated analytical models to model financial risk (Manthoulis et al., 2020).

           For the period from 1900 to 2000, the bank assets of the U.S. economy remained remarkably stable even as the size of the U.S. economy increased dramatically. The bank assets of the U.S. economy fluctuated less than 5% over the course of that century. In addition, U.S. banks diversified from primarily local money market funds (deposits placed with their banks by wealthy people for safety and liquidity) in 1900 to a combination of local money market funds and savings and loans in 2000. Savings and loans (a precursor to community banks) provided bank loans to local businesses and homeowners. The diversification process was accompanied by an increase in loan loss reserves in the mid-1900s. Because the banking system became more risk-averse during this period of growth, the banking industry was forced to shrink. In recent years, the savings and loan crisis forced banks to shrink further. Banks then failed in 2008 during the financial crisis, and they again shrank in the aftermath of the crisis. In 2016, the banking system is recovering.

             Banks can collapse due to a range of factors such as undercapitalization, liquidity, safety and soundness, and fraud risk. The loss of some banks due to such events is said to be credit-linked losses (LIL), and the loss associated with such events is called credit-based losses (Shim, 2019). Credit-based losses can be classified as the main (negative) loss and the secondary (positive) loss. In general, the primary loss will be the loss owing to legal action (such as bankruptcy), and the secondary loss will be the loss owing to reputational loss due to the loss in market share, customer relationship, or reputation (the three primary sources of loss reported by insurance).