How to Destabilize the Financial System: A Beginner’s Guide

In 2009, in the aftermath of the Global Financial Crisis, 140 American banks failed—and hundreds of other banks were classified as “problem institutions” by the FDIC. This has led to numerous books and articles examining the causes of systemic risk in our financial system. In this paper we step back in history, to see what we should have learned from a previous banking crisis, which occurred during the 1980s. In particular, we examine the downfall of the Penn Square Bank in 1982. The failure of the small Oklahoma bank caused enormous losses and widespread instability in the banking system. It is evident that many of the factors which led to the downfall of Penn Square in the 1980s have reappeared more recently—albeit in a slightly different guise.