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Bank Failure: Evidence from the Colombia Financial Crisis

  • Gomez-Gonzalez, Jose E.

    (Cornell U and Banco de la Republica)

  • Kiefer, Nicholas M.

    (Cornell U and OCC)

This paper identifies the main bank specific determinants of bank 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 can be explained by differences in financial health and prudence across institutions. The capitalization ratio is the most significant indicator explaining bank failure. 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. Our results thus provide empirical support for existing regulatory practice. Other important variables explaining bank failure dynamics are bank's size and profitability.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 06-12.

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Date of creation: Oct 2006
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Handle: RePEc:ecl:corcae:06-12
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  1. José D. Uribe & Hernando Vargas, 2002. "Financial Reform, Crisis And Consolidation In Colombia," BORRADORES DE ECONOMIA 002724, BANCO DE LA REPÚBLICA.
  2. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  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.
  4. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers 93-2, Federal Reserve Bank of Boston.
  5. 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.
  6. Carree, Martin A., 2003. "A hazard rate analysis of Russian commercial banks in the period 1994-1997," Economic Systems, Elsevier, vol. 27(3), pages 255-269, September.
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