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Explaining time to bank failure in Colombia during the financial crisis of the late 1990s

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  • Jose E. Gomez-Gonzalez
  • Nicholas M. Kiefer

Abstract

This paper identifies the main bank specific determinants of time to failure during the financial crisis in Colombia using duration analysis. Using partial likelihood estimation, it shows that the process of failure of financial institutions during that period was not a merely random process; instead, it can be explained by differences in financial health and prudence existing across institutions. Among the relevant indicators that explain bank failure, the capitalization ratio appears to be the most significant one. Increases in this ratio lead to a reduction in the hazard rate of failure at any given moment in time. Of special relevance, this ratio exhibits a non-linear component. Other important variables explaining bank failure dynamics are profitability of assets and the ratio of non-performing loans to total loans. Leverage appears to affect the hazard rate also, but with lower statistical significance.

Suggested Citation

  • Jose E. Gomez-Gonzalez & Nicholas M. Kiefer, 2006. "Explaining time to bank failure in Colombia during the financial crisis of the late 1990s," Borradores de Economia 400, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:400
    DOI: 10.32468/be.400
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    References listed on IDEAS

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    1. José D. Uribe & Hernando Vargas, 2002. "Financial Reform, Crisis And Consolidation In Colombia," Borradores de Economia 2724, Banco de la Republica.
    2. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
    3. David C. Wheelock & Paul W. Wilson, 2000. "Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 127-138, February.
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    5. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
    6. Mr. Robert Billings & Ms. Brenda Gonzalez-Hermosillo & Ceyla Pazarbasioglu, 1996. "Banking System Fragility: Likelihood Versus Timing of Failure: An Application to the Mexican Financial Crisis," IMF Working Papers 1996/142, International Monetary Fund.
    7. 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, vol. 27(Q I), pages 21-31.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banks; financial institutions; Bankruptcy; liquidation; Colombia.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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