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The United Kingdom's small banks' crisis of the early 1990s: what were the leading indicators of failure?

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  • Andrew Logan

Abstract

The announcement of BCCI's closure on 5 July 1991 rapidly accelerated the withdrawal of wholesale funds from small and medium-sized UK banks. Within three years, a quarter of the banks in this sector had, in some sense, failed. This study employs a logit model to analyse at two points prior to the crisis the distinct characteristics of the banks that failed compared with those that survived. Perhaps not surprisingly, a number of measures of bank weakness - low loan growth, poor profitability and illiquidity - are found to be good short-term predictors of failure, as are a high dependence on net interest income and low leverage. The best longer-term leading indicator of future failure, however, is rapid loan growth at the peak of the previous boom.

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  • Andrew Logan, 2001. "The United Kingdom's small banks' crisis of the early 1990s: what were the leading indicators of failure?," Bank of England working papers 139, Bank of England.
    • Handle: RePEc:boe:boeewp:139
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    2. Gillian Garcia & Henriëtte Prast, 2004. "Depositor and investor protection in the Netherlands: past, present and future," DNB Occasional Studies 202, Netherlands Central Bank, Research Department.
    3. Giancarlo Corsetti & Barry Eichengreen & Galina Hale & Eric Tallman, 2020. "The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis," Open Economies Review, Springer, vol. 31(2), pages 219-236, April.
    4. Shaharudin, Roselee, 2004. "A Review on Accounts Manipulation Via Loan Loss Provisions to Manage Regulatory Capital and Earnings Along Business Cycle," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 38, pages 99-123.
    5. Corsetti, Giancarlo & Eichengreen, Barry & Hale, Galina & Tallmann, Eric, 2019. "The Euro Crisis in the Mirror of the EMS," Santa Cruz Department of Economics, Working Paper Series qt8rk7w2nk, Department of Economics, UC Santa Cruz.
    6. Stelios Markoulis & Panagiotis Ioannou & Spiros Martzoukos, 2023. "Bank distress in the European Union 2008–2015: A closer look at capital, size and revenue diversification," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 792-820, January.
    7. Fabrizio Ferriani & Wanda Cornacchia & Paolo Farroni & Eliana Ferrara & Francesco Guarino & Francesco Pisanti, 2019. "An early warning system for less significant Italian banks," Questioni di Economia e Finanza (Occasional Papers) 480, Bank of Italy, Economic Research and International Relations Area.
    8. Juan Francisco Martínez & José Miguel Matus & Daniel Oda, 2018. "Taxonomy of Chilean Financial Fragility Periods from 1975 to 2017," Working Papers Central Bank of Chile 822, Central Bank of Chile.
    9. Garel, Alexandre & Petit-Romec, Arthur, 2017. "Bank capital in the crisis: It's not just how much you have but who provides it," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 152-166.
    10. Meeks, Roland, 2017. "Capital regulation and the macroeconomy: Empirical evidence and macroprudential policy," European Economic Review, Elsevier, vol. 95(C), pages 125-141.
    11. Aerdt Houben & Jan Kakes & Garry Schinasi, 2004. "Towards a framework for financial stability," DNB Occasional Studies 201, Netherlands Central Bank, Research Department.
    12. Molina, Carlos A., 2002. "Predicting bank failures using a hazard model: the Venezuelan banking crisis," Emerging Markets Review, Elsevier, vol. 3(1), pages 31-50, March.

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