When a steel company goes bankrupt, other companies in the same industry benefit because they have one less competitor.But when a bank goes bankrupt, other banks do not necessarily benefit. Explain...

When a steel company goes bankrupt, other companies in the same industry benefit because they have one less competitor.

But when a bank goes bankrupt, other banks do not necessarily benefit. Explain this statement.

Asked on by aryan08me

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted on

Usually, when a manufacturing firm goes bankrupt, it is not considered to be due to a problem with the prevailing rules that regulate and entire industry. It is merely considered to be a single incident where the way the company operated led to a situation where it could not make profits and the liabilities increased to an unsustainable level.

On the other hand banks and companies in the financial sector do not operate in the way that a manufacturing company would. Here, investments made are highly leveraged. A small change in the price of the assets with the bank can lead to large losses.

There is also a much higher role played by risk in the financial sector. Also, the effect of a bank collapsing is felt by a considerably larger number of people and at a much larger scale.

This makes regulators immediately start to look closely at the reasons behind the collapse and they try to create new rules that are applicable for all banks. As the new regulations are meant to prevent other banks from collapsing, ways to reduce risk are introduced. These influence the way all banks operate and force them to make drastic changes which are usually in the opposite direction of how they had done things earlier.

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