Pushing the total failures to a whopping 92 entities this year, three more US banks (Venture Bank, Brickwell Community Bank and Corus Bank) shut down on September 11, while the count of collapses is more than three-fold that of 2008 when 25 banks went out of business due to financial recession. However, bank failures are increasing even as the economy is showing uncertain signs of revival gradually. In August, a stunning number of 15 banks collapsed while recently it is said the number of problem banks have shot up to 416 in the June quarter. These failures highlight the continued weakness in the US banking system.

A wake up call for Western Banks

Name any global top 20 US and European new age bank that didn't suffer huge losses in the wake of subprime crisis – the prize is yours. Sub-prime spawned recession harshly brought these banks from rarefied heights in recent years to the governments' floors. Thanks to the housing bubble burst, now the traditional banking model is once again hot.

Banks in India and other Asian countries which were once maligned for lacking enterprising capabilities seem to have handled the recession well and are reporting good profits as well.

Why the Western Banks failed?

In this scenario one is compelled to compare the performance of Western Banks and their counterparts in Asian countries. Questions arise as to why the hollowness in banking business model that thrived on excessive leverage was not spotted early on. To borrow from author Brian L. Weiss whose first book was ‘Many Lives, Many Masters', many failures and many reasons for the current pathetic state of global banking system. To put succinctly, I see three major reasons for the Western banks failure.

First, majority of the American and European Banks like Citibank (C), UBS, Washington Mutual (WM) and others took excessive leverage to make imprudent loans.

Second, over reliance on the exotic financial instruments, driven by fancy mathematical models, promised to wipeout risk once and for all for the Banks but ended up nearly wiping out the Banks themselves instead (Many of the financial derivative products were too complex, far in excess of the real needs of any economy. The only purpose of these products was to ensure financial institutions made money, instead of providing any genuine wider economic benefit).

Third, central bankers' excessive faith in markets' ability to correct themselves.

In contrast to Western banks, Asian banks seemed to have averted the crisis.