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Déjà vu all over again: The causes of U.S. commercial bank failures this time around

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  • Cole, Rebel A.
  • White, Lawrence J.

Abstract

In this study, we analyze why U.S. commercial banks failed during the recent financial crisis. We find that proxies for commercial real estate investments, as well as traditional proxies for the CAMELS components, do an excellent job in explaining the failures of banks that were closed during 2009, just as they did in the previous banking crisis of 1985 – 1992. Surprisingly, we do not find that residential mortgage-backed securities played a significant role in determining which banks failed and which banks survived.

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File URL: http://mpra.ub.uni-muenchen.de/29181/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24690.

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Date of creation: 28 Jul 2010
Date of revision: 28 Jul 2010
Handle: RePEc:pra:mprapa:24690

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Keywords: bank; bank failure; CAMELS; commercial real estate; construction; FDIC; financial crisis; mortgage-backed security; residential mortgage; residential real estate;

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References

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  1. Rebel A. Cole & Jeffery W. Gunther, 1993. "Separating the likelihood and timing of bank failure," Finance and Economics Discussion Series 93-20, Board of Governors of the Federal Reserve System (U.S.).
  2. Rebel Cole & Jeffery Gunther, 1998. "Predicting Bank Failures: A Comparison of On- and Off-Site Monitoring Systems," Journal of Financial Services Research, Springer, vol. 13(2), pages 103-117, April.
  3. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
  4. Demyanyk , Yuliya & Hasan, Iftekhar, 2009. "Financial crises and bank failures: a review of prediction methods," Research Discussion Papers 35/2009, Bank of Finland.
  5. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
  6. Klaus Schaeck, 2008. "Bank Liability Structure, FDIC Loss, and Time to Failure: A Quantile Regression Approach," Journal of Financial Services Research, Springer, vol. 33(3), pages 163-179, June.
  7. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  8. Arvind Krishnamurthy, 2010. "How Debt Markets Have Malfunctioned in the Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 3-28, Winter.
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Citations

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Cited by:
  1. DeYoung, Robert & Torna, Gökhan, 2013. "Nontraditional banking activities and bank failures during the financial crisis," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 397-421.
  2. Gerhard Hambusch & Sherrill Shaffer, 2012. "Forecasting Bank Leverage," Research Paper Series 320, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Hau, Harald & Langfield, Sam & Marqués Ibañez, David, 2012. "Bank ratings: What determines their quality?," CEPR Discussion Papers 9171, C.E.P.R. Discussion Papers.
  4. Paul Kupiec & Haluk Unal, 2012. "Editors’ Note on the Special Issue of the 10th FDIC/JFSR Bank Research Conference," Journal of Financial Services Research, Springer, vol. 42(1), pages 1-3, October.
  5. Kandrac, John, 2014. "Bank Failure, Relationship Lending, and Local Economic Performance," Finance and Economics Discussion Series 2014-41, Board of Governors of the Federal Reserve System (U.S.).
  6. Vincent Bouvatier & Michael Brei & Xi Yang, 2014. "Bank Failures and the Source of Strength Doctrine," EconomiX Working Papers 2014-15, University of Paris West - Nanterre la Défense, EconomiX.
  7. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
  8. Apergis, Nicholas, 2014. "The long-term role of non-traditional banking in profitability and risk profiles: Evidence from a panel of U.S. banking institutions," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 61-73.
  9. David G. Mayes & Hanno Stremmel, 2014. "The Effectiveness of Capital Adequacy Measures in Predicting Bank Distress," SUERF Studies, SUERF - The European Money and Finance Forum, number 2014/1.
  10. Betz, Frank & Oprica, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2013. "Predicting distress in European banks," Working Paper Series 1597, European Central Bank.
  11. Fungácová, Zuzana & Turk Ariss, Rima & Weill, Laurent, 2013. "Does excessive liquidity creation trigger bank failures?," BOFIT Discussion Papers 2/2013, Bank of Finland, Institute for Economies in Transition.
  12. Robert DeYoung, 2012. "A Commentary on “Measuring Systemic Risk”," Journal of Financial Services Research, Springer, vol. 42(1), pages 109-114, October.
  13. Imbierowicz, Björn & Rauch, Christian, 2014. "The relationship between liquidity risk and credit risk in banks," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 242-256.
  14. Fiordelisi, Franco & Mare, Davide Salvatore, 2013. "Probability of default and efficiency in cooperative banking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 30-45.
  15. Claudia Lambert & Felix Noth & Ulrich Schüwer, 2013. "How Do Insured Deposits Affect Bank Risk?: Evidence from the 2008 Emergency Economic Stabilization Act," Discussion Papers of DIW Berlin 1347, DIW Berlin, German Institute for Economic Research.
  16. Maghyereh, Aktham I. & Awartani, Basel, 2014. "Bank distress prediction: Empirical evidence from the Gulf Cooperation Council countries," Research in International Business and Finance, Elsevier, vol. 30(C), pages 126-147.
  17. Jin, Justin Yiqiang & Kanagaretnam, Kiridaran & Lobo, Gerald J., 2013. "Unintended consequences of the increased asset threshold for FDICIA internal controls: Evidence from U.S. private banks," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4879-4892.
  18. Lambert, Claudia & Noth, Felix & Schüwer, Ulrich, 2013. "How do insured deposits affect bank risk? Evidence from the 2008 emergency economic stabilization act," SAFE Working Paper Series 38, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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