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For how long are newly chartered banks financially fragile?

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  • Robert DeYoung
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    Abstract

    We examine the financial performance of 1,664 commercial banks chartered between 1980 and 1985, a period of intense chartering activity just preceding the banking recession of the late-1980s. We compare new banks to a benchmark sample of 2,047 small established banks. Using a split population duration model, we estimate the probability distribution of long-run failure for both sets of banks over a 14 year period, and assess how regulatory, environmental, and bank specific conditions affect that probability distribution. We find that the fragility of a new bank varies over time in a fairly regular ‘life cycle’ pattern, but that how this basic life cycle pattern is positioned vis a vis the business cycle also matters. On average, new banks are initially less likely to fail than established banks; after about four years they become more likely to fail than established banks; and as time passes and new banks mature they fail at rates similar to established banks. But banks chartered just prior to the banking recession failed at the highest rates, and their estimated hazard functions followed an extreme life cycle shape. State laws restricting the acquisition of de novo banks are associated with higher rates of new bank failure, but easy-entry chartering policies are not. We find that de novo failure is more sensitive to capital levels than established bank failure, evidence that Justifies recent increases in minimum capital requirements for de novo banks. Finally, our results suggest that early warning signals may be easier to identify for de novo banks than for established banks, perhaps because banks in the early stages of their life cycles are less heterogeneous and hence simpler to model than mature banks.

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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2000/wp2000_09.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-9.

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    Date of creation: 2000
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    Handle: RePEc:fip:fedhwp:wp-00-9

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    Related research

    Keywords: Bank management ; Bank supervision;

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    References

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    1. DeYoung, Robert & Goldberg, Lawrence G. & White, Lawrence J., 1999. "Youth, adolescence, and maturity of banks: Credit availability to small business in an era of banking consolidation," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 463-492, February.
    2. Schmidt, Peter & Witte, Ann Dryden, 1989. "Predicting criminal recidivism using 'split population' survival time models," Journal of Econometrics, Elsevier, vol. 40(1), pages 141-159, January.
    3. David C. Wheelock & Paul W. Wilson, 1995. "Why do banks disappear? The determinants of U.S. bank failures and acquisitions," Working Papers 1995-013, Federal Reserve Bank of St. Louis.
    4. Gary Whalen, 1991. "A proportional hazards model of bank failure: an examination of its usefulness as an early warning tool," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 21-31.
    5. Allen N. Berger & Seth D. Bonime & Lawrence G. Goldberg & Lawrence J. White, 1999. "The dynamics of market entry: the effects of mergers and acquisitions on de novo entry in banking," Proceedings 612, Federal Reserve Bank of Chicago.
    6. William R. Keeton, 2000. "Are mergers responsible for the surge in new bank charters?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 21-41.
    7. DeYoung, Robert & Hasan, Iftekhar, 1998. "The performance of de novo commercial banks: A profit efficiency approach," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 565-587, May.
    8. David C. Wheelock & Paul W. Wilson, 1993. "Explaining bank failures: deposit insurance, regulation, and efficiency," Working Papers 1993-002, Federal Reserve Bank of St. Louis.
    9. Enrico Santarelli, 2000. "The duration of new firms in banking: an application of Cox regression analysis," Empirical Economics, Springer, vol. 25(2), pages 315-325.
    10. Robert DeYoung, 1999. "Birth, growth, and life or death of newly chartered banks," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 18-35.
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    Cited by:
    1. Örs, Evren, 2006. "The Role of Advertising in Commercial Banking," CEPR Discussion Papers 5461, C.E.P.R. Discussion Papers.

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