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Predicting Small Bank Failure

Author

Listed:
  • Wilton E. Heyliger

    (Morris Brown College)

  • Don P. Holdren

    (Marshall University)

Abstract

There are many studies of bank performance and bank failure in the literature. Most of these studies used banking ratios as variables in their models without giving consideration to their appropriateness, nor was much consideration given to the stability of those ratios through time and across asset size. Many studies also failed to recognize that bank structure may differ by asset size. This study evaluates a large number of banking variables in order to identify stable ratios. These ratios are then used in disaggregated logistic models to predict bank failure. The study finds that the disaggregated models with stable variables were better predictors of bank failure than aggregated models used in earlier studies.

Suggested Citation

  • Wilton E. Heyliger & Don P. Holdren, 1991. "Predicting Small Bank Failure," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(2), pages 125-140, Winter.
    • Handle: RePEc:pep:journl:v:1:y:1991:i:2:p:125-140
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    References listed on IDEAS

    as
    1. Larry D. Wall, 1987. "F.Y.I. commercial bank profitability: some disturbing trends," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 24-36.
    2. Benston, George J & Hanweck, Gerald A & Humphrey, David B, 1982. "Scale Economies in Banking: A Restructuring and Reassessment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 435-456, November.
    3. Dambolena, Ismael G & Khoury, Sarkis J, 1980. "Ratio Stability and Corporate Failure," Journal of Finance, American Finance Association, vol. 35(4), pages 1017-1026, September.
    4. Lynn A. Nejezchleb, 1986. "Declining profitability at small commercial banks: a temporary development or a secular trend?," Proceedings 134, Federal Reserve Bank of Chicago.
    5. Martin, Daniel, 1977. "Early warning of bank failure : A logit regression approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 249-276, November.
    6. West, Robert Craig, 1985. "A factor-analytic approach to bank condition," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 253-266, June.
    7. Meyer, Paul A & Pifer, Howard W, 1970. "Prediction of Bank Failures," Journal of Finance, American Finance Association, vol. 25(4), pages 853-868, September.
    8. Libby, R, 1975. "Accounting Ratios And Prediction Of Failure - Some Behavioral Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 13(1), pages 150-161.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Stephen M. Miller & Athanasios Noulas, 1995. "Explaining Recent Connecticut Bank Failures," Working papers 1995-01, University of Connecticut, Department of Economics.

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    More about this item

    Keywords

    Bank; Small Bank; Failure;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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