What are the add-on losses faced by a bank that is going bankrupt?

What are the add-on losses faced by a bank that is going bankrupt?

I. The discount accepted by the bank for selling its assets in a fire sale.

II. The increased cost of funding liabilities in a financially distressed situation.

III. The reduction in the present value of future growth opportunities.

IV. Loss of goodwill and intangible assets.
A . I, II
B . II, III, IV
C . III, IV
D . I, II, III, IV.

View Answer

Answer: D

Explanation:

When a bank is going bankrupt, it faces several additional losses beyond the immediate operational and financial losses.

These include:

I. The discount accepted by the bank for selling its assets in a fire sale: In a fire sale, assets are sold quickly and often at a significantly reduced price, resulting in substantial losses.

II. The increased cost of funding liabilities in a financially distressed situation: As the bank’s financial condition deteriorates, its cost of borrowing increases due to higher perceived risk, leading to increased expenses.

III. The reduction in the present value of future growth opportunities: Financial distress often means the bank cannot invest in future opportunities, significantly impacting its long-term profitability and growth potential.

IV. Loss of goodwill and intangible assets: The bank’s reputation, brand value, and other intangible assets suffer significantly during bankruptcy, leading to additional losses.

References: These points are corroborated by the information provided in "How Finance Works," detailing the various forms of losses faced by banks in distress situations??.