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Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions

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David C. Wheelock
Paul W. Wilson

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Abstract

This paper seeks to identify the characteristics that make individual U.S. banks more likely to fail or be acquired. We use bank-specific information to estimate competing-risks hazard models with time-varying covariates. We use alternative measures of productive efficiency to proxy management quality, and find that inefficiency increases the risk of failure while reducing the probability of a bank's being acquired. Finally, we show that the closer to insolvency a bank is (as reflected by a low equity-to-assets ratio) the more likely is its acquisition. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 82 (2000)
Issue (Month): 1 (February)
Pages: 127-138
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Handle: RePEc:tpr:restat:v:82:y:2000:i:1:p:127-138

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  1. Berger, Allen N. & Hanweck, Gerald A. & Humphrey, David B., 1987. "Competitive viability in banking : Scale, scope, and product mix economies," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 501-520, December. [Downloadable!] (restricted)
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  2. Waldman, Donald M., 1982. "A stationary point for the stochastic frontier likelihood," Journal of Econometrics, Elsevier, vol. 18(2), pages 275-279, February. [Downloadable!] (restricted)
  3. KNEIPÊ, Alois & PARKÊ, ByeongÊU. & SIMARÊ, LŽopold, 1996. "A Note on the Convergence of Nonparametric DEA Efficiency Measures," CORE Discussion Papers 1996039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  4. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April. [Downloadable!] (restricted)
  5. Katz, Lawrence F & Meyer, Bruce D, 1990. "Unemployment Insurance, Recall Expectations, and Unemployment Outcomes," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 973-1002, November. [Downloadable!] (restricted)
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  6. Dean F. Amel & Stephen A. Rhoades, 1989. "Empirical Evidence on the Motives for Bank Mergers," Eastern Economic Journal, Eastern Economic Association, vol. 15(1), pages 17-27, Jan-Mar. [Downloadable!]
  7. Kaparakis, Emmanuel I & Miller, Stephen M & Noulas, Athanasios G, 1994. "Short-Run Cost Inefficiency of Commercial Banks: A Flexible Stochastic Frontier Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 875-93, November. [Downloadable!] (restricted)
  8. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1996. "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Center for Financial Institutions Working Papers 96-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  9. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June. [Downloadable!] (restricted)
  10. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July. [Downloadable!] (restricted)
  11. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245. [Downloadable!] (restricted)
  12. Hannan, Timothy H & Rhoades, Stephen A, 1987. "Acquisition Targets and Motives: The Case of the Banking Industry," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 67-74, February. [Downloadable!] (restricted)
  13. Fare, Rolf & Shawna Grosskopf & Mary Norris & Zhongyang Zhang, 1994. "Productivity Growth, Technical Progress, and Efficiency Change in Industrialized Countries," American Economic Review, American Economic Association, vol. 84(1), pages 66-83, March. [Downloadable!] (restricted)
  14. Allen N. Berger & David B. Humphrey, 1992. "Megamergers in banking and the use of cost efficiency as an antitrust defense," Finance and Economics Discussion Series 203, Board of Governors of the Federal Reserve System (U.S.).
  15. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November. [Downloadable!] (restricted)
  16. Richard S. Barr & Thomas F. Siems, 1994. "Predicting bank failure using DEA to quantify management quality," Financial Industry Studies Working Paper 94-1, Federal Reserve Bank of Dallas.
  17. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November. [Downloadable!] (restricted)
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  18. Berger, Allen N. & Hunter, William C. & Timme, Stephen G., 1993. "The efficiency of financial institutions: A review and preview of research past, present and future," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 221-249, April. [Downloadable!] (restricted)
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