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Path modeling to bankruptcy: causes and symptoms of the banking crisis

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  • Carlos Serrano-Cinca
  • Y. Fuertes-Callén
  • Begoña Gutiérrez-Nieto
  • B. Cuéllar-Fernández

Abstract

This paper studies the bankruptcy of USA banks since 2009. It first analyzes the financial symptoms that precede bankruptcy, such as low profitability, insufficient revenue, or low solvency ratios. It also goes into the causes of these symptoms. It poses several hypotheses on causes of failure, such as loans growth (some of them risky), specialization (in this case concentration in real estate), and the pursuit of a turnover-driven strategy neglecting margin. It presents and tests a path modeling to bankruptcy based on structural equations, hypotheses tests and logistic regression. Results show that, five years before the crisis, failed banks had, compared to solvent banks, the following: higher loan growths, higher concentration on real estate loans, higher risk ratios, higher turnover, but lower margins. A relationship is found between symptoms and causes. Failed banks present a significant relationship between the percentage of real estate loans and risk. This relationship is negative in excellent banks, confirming that they allocated less real estate loans with higher quality. Non-failed banks compensated increases in risk by strengthening their core capital.

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File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/78756/1/wp11007.pdf
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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 11-007.

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Length: 23 p.
Date of creation: Mar 2011
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/78756

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Keywords: Bankruptcy; Financial ratios; banking crisis; solvency; PLS-Path;

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  1. Demyanyk , Yuliya & Hasan, Iftekhar, 2009. "Financial crises and bank failures: a review of prediction methods," Research Discussion Papers 35/2009, Bank of Finland.
  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  3. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2010. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1417-1435, July.
  4. Ioannidis, Christos & Pasiouras, Fotios & Zopounidis, Constantin, 2010. "Assessing bank soundness with classification techniques," Omega, Elsevier, vol. 38(5), pages 345-357, October.
  5. Premachandra, I.M. & Chen, Yao & Watson, John, 2011. "DEA as a tool for predicting corporate failure and success: A case of bankruptcy assessment," Omega, Elsevier, vol. 39(6), pages 620-626, December.
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