Literature Review: The Causes Of Banking Failures In The Banking Industry

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CHAPTER 2

LITERATURE REVIEW

INTRODUCTION

In this chapter will examine the factors that related to the banking distress. The first subsection looks on relationship between banking distress and stability, the second subsection looks at the relationship between macroeconomic and stability, the third subsection looks at the relationship between stability and banking system and lastly on the conceptual framework.

2.1 BANKING DISTRESS

Globalization has also contributed to the bank been involved in distress in recent time. John, Gianni and Elena (2008) stated that banks distress can be triggered by weakness in banking system, characterized by persistent illiquidity, insolvency, undercapitalization, level of nonperforming loans and weak, corporate governance among others. Many people erroneously confuse bank distress with bank failure, which are technically distinct. Bank distress is the forerunner of bank failure.

A bank in distress has chance to regained health, whereas a failed bank loses every chance of life. Attempt have been made by different experts to define “distress” in banks and in other financial industry. The advanced learners Dictionary defines distress as a state of great pain, discomfort or sorrow, while the oxford dictionary defines distress as enormous pressure or strains. The banking industry in any economy in the world is the most important sector because of their ability to mobilize funds from the savings to the deficit sector of that economy. The

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