Did United States Sub-Prime Crisis Cause Seylan Bank Distress? A Case Study

Abstract

Seylan Bank PLC, the sixth largest commercial bank in Sri Lanka, faced a deposit run towards the end of December 2008. This was a severe blow to the Sri Lankan financial system because no other commercial bank in the country had suffered a similar situation in the past. Since this distress occurred along with the US subprime crisis, it was often presumed that Seylan Bank failure was directly attributable to the crisis. This paper sheds a light on the Seylan Bank’s profitability and financial stability over the period from 2004 to 2008 while exploring its links with other financial institutions to investigate the causes of distress. The evidence suggests that the Seylan Bank distress was mainly resulted from the long standing management deficiencies prevailed in the bank rather than due to direct effects of the US subprime crisis. Failure of the Golden Key Credit Card Company Ltd. can be directly attributed to the crisis. The resulting contagion effects have triggered the distress in the bank which was already vulnerable to an external shock even though severe issues in the fundamentals of the bank could not be observed. The findings of the study emphasize the necessity of a dynamic regulatory framework and measures to increase the financial literacy among the public to maintain a satisfactory level of financial system stability.