What caused the Bank of New England collapse?
The dramatic collapse and federal seizure of the Bank of New England in 1991 was caused by an aggressive commercial expansion strategy, heavily concentrated exposure to the collapsing New England real estate market, and a massive liquidity crisis. During the mid-1980s real estate boom, the bank aggressively issued massive commercial property and construction loans with relaxed underwriting standards. When the regional commercial property market suffered a severe downturn, a staggering percentage of these loans defaulted, resulting in over a billion dollars in sudden financial losses. This provoked a massive, panic-driven run on deposits as corporate and retail customers rushed to withdraw billions in a single day, forcing federal regulators to step in and execute a historic insolvency resolution.
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The Bank of New England, which grew rapidly as a major regional interstate banking corporation during the 1980s, suffered a catastrophic collapse due to heavy exposure to bad real estate loans during the severe regional property market crash.