Behind the Fall: An Analysis of Fragility and Failures in the U.S. Banking System

Abstract

Since the early 1800s, U.S. bank failures have imposed recurring costs to society. This qualitative study employs a narrative case study review of major U.S. banking crises – from the Panic of 1819 through the 2023 collapses – augmented by a synthesis of theoretical models and a chronicle of regulatory evolution to uncover interconnected, less quantifiable, and often overlooked drivers of bank distress. This study finds that no single factor explains a failure; rather, multiple causes synthesized in five risk buckets – funding and liquidity stress; capital, asset quality and market risk weaknesses; governance, operational and behavioural failures; distortions in regulatory architecture and incentives; and macro-financial, geopolitical and external shocks – jointly precipitate each breakdown. An interaction matrix demonstrates how these factors reinforce one another in chain reactions. The study concludes that policymakers should adopt dialectic-resistant, forward-looking regulations, realign regulator and banker incentives, and raise capital requirements on a bank-by-bank basis, building enough system wide equity to cover roughly $2.2 trillion in mark-to-market losses that would surface if all U.S. bank assets were priced at current market values and about equal to today’s aggregate bank capital.