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Bank Failure: Evidence from the Colombia Financial Crisis

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Author Info
Gomez-Gonzalez, Jose E. (Cornell U and Banco de la Republica)
Kiefer, Nicholas M. (Cornell U and OCC)

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Abstract

This paper identifies the main bank specific determinants of bank failure during the financial crisis in Colombia using duration analysis. Using partial likelihood estimation, it shows that the process of failure of financial institutions during that period can be explained by differences in financial health and prudence across institutions. The capitalization ratio is the most significant indicator explaining bank failure. Increases in this ratio lead to a reduction in the hazard rate of failure at any given moment in time. Of special relevance, this ratio exhibits a non-linear component. Our results thus provide empirical support for existing regulatory practice. Other important variables explaining bank failure dynamics are bank's size and profitability.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 06-12.

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Date of creation: Oct 2006
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Handle: RePEc:ecl:corcae:06-12

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Find related papers by JEL classification:
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

References listed on IDEAS
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  1. Carree, Martin A., 2003. "A hazard rate analysis of Russian commercial banks in the period 1994-1997," Economic Systems, Elsevier, vol. 27(3), pages 255-269, September. [Downloadable!] (restricted)
  2. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52. [Downloadable!]
  3. David C. Wheelock & Paul W. Wilson, 2000. "Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 127-138, February. [Downloadable!] (restricted)
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  4. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June. [Downloadable!] (restricted)
  5. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers 93-2, Federal Reserve Bank of Boston. [Downloadable!]
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  1. José E. Gómez González & Nicholas M. Kiefer, 2007. "Evidence of non-Markovian behavior in the process of bank rating migrations," BORRADORES DE ECONOMIA 004016, BANCO DE LA REPÚBLICA. [Downloadable!]
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  2. Jose E. Gómez & Paola Morales & Fernando Pineda & nzamudgo@banrep.gov.co, . "An Alternative Methodology for Estimating Credit Quality Transition Matrices," Borradores de Economia 478, Banco de la Republica de Colombia. [Downloadable!]
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