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Bank failures in banking panics: Risky banks or road kill?

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  • Gerald P. Dwyer
  • Rik Hafer

Abstract

Are banks that fail in banking panics the riskiest ones prior to the panics? The free banking era in the United States provides useful data to examine this question because the assets held by the banks were traded at the New York Stock Exchange. The authors estimate the ex ante riskiness of a bank?s portfolio by examining the portfolio relative to mean-variance frontiers and by examining the bank's leverage and notes relative to assets. The authors find that the ex ante riskiness of a bank?s portfolio helps predict which banks fail and the extent of noteholders? losses in the event of failure.

Suggested Citation

  • Gerald P. Dwyer & Rik Hafer, 2001. "Bank failures in banking panics: Risky banks or road kill?," FRB Atlanta Working Paper 2001-13, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2001-13
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    References listed on IDEAS

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    Cited by:

    1. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    2. François Marini, 2006. "Optimal financial crises: A note on Allen and Gale," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 31(1), pages 61-66, July.
    3. Patrick Van Cayseele, 2004. "Financial consolidation and liquidity: prudential regulation and/or competition policy?," Working Paper Research 50, National Bank of Belgium.

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    Keywords

    Risk; Debt; Bank supervision; Bank failures;
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