In the modern society, most people now save money in banks, whether the bank is big or small. When a bank fails it implies that the savings made in the bank by customers are lost. The banking sector helps people to save money and other valuables for investment purposes or business activities. Its failure would thus mean the great loss of these savings and valuables. When banks fail the losses are incurred by the shareholders as well as the creditors, customers, and the deposit insurer. To minimize these losses to the creditors deposit insurance is very important to banks to for the depositors to recover their money. A bank is seen to collapse if the asset capital declines compared to the total costs in debtors. In such circumstances, the bank is unable to pay all of its creditors in full and on time. There is need to correct this anomaly as soon as is realized to avoid banks failing. Small banks borrow from big banks. Nevertheless, banks share common money transactions systems especially with respect to borrowing and lending to their customers. For instance, if any one bank fails it is likely to pass over to other banks and this can happen with a short period of time. Thus, the banking system is vulnerable to risks associated with the banking sector. The risks spill over from one bank to another bank. The failure of one bank to honor the required expectations to another bank can result into far reaching effects on other banks. It is therefore imperative to save banks whether they are big or small because of the interrelationship of the banks in the banking process.
The global great recession of 2008 happened in an abrupt manner and because of its complicated cause, it continued to disturb the policymakers, economists and other people and affected the banks and companies, and then economies across the world. The economic downturn had adverse consequences for households as a result of rising unemployment and poverty. The main causes of the great recession include, loose monetary policy, global imbalances and the search for higher yields, misperception of risk and lax financial regulation. The US monetary authorities reduced the policy interest rate to low levels and thus triggered a debt-financed consumption boom that led the way in boosting global aggregate demand. This monetary policy in the US and the globe failed to solve the growing ripple effect in asset markets. At loose monetary policy contributed to the rapid growth in mortgages to sub-prime borrowers. The low interest environment in the US continued because oil exporters in the Middle East and main export led by China in East Asia expressed a desire for building up foreign exchange reserves in US dollar dominated assets. The growing risks in the incentives resulting from investment in homeownership and financial incentives led to more and more people investing in this sector hence this caused the recession. What triggered the recession in the US was the housing market. The Federal Reserve begun revising interest rates upwards, this caused an increase of interest rate on home loans. This rise in bad loans eventually led to the failure of several mortgage lenders. The US credit crunch triggered the global economic recession. The global dependence on the US markets especially on the foreign exchange is what contributed to the collapse of the global economy.