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Do bank failures still matter in affecting regional economic activity?

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  • Ghosh, Amit

Abstract

Using a panel dataset covering all 50 states and the District of Columbia for 1984–2014, this study examines the consequences of commercial bank failures on the regional economy. Employing both single-equation panel estimations as well as panel VAR models, I find credit crunch and bank-business relationship channels to be operative at the state-level. Although the deleterious effect of bank failures is found on different measures of regional economic activity including industry-specific labor and goods markets, it is most pronounced on construction-sector employment and GDP growth rates. The findings imply when credit flows are disrupted, potential borrowers like construction companies and building contractors may not be able to secure funds to undertake investment activities, leading to a decline in employment and output growth. The results call for constant monitoring of banks by banking regulatory authorities and identifying early warning signals of bank failures to mitigate their potential real sector losses.

Suggested Citation

  • Ghosh, Amit, 2017. "Do bank failures still matter in affecting regional economic activity?," Journal of Economics and Business, Elsevier, vol. 90(C), pages 1-16.
    • Handle: RePEc:eee:jebusi:v:90:y:2017:i:c:p:1-16
    DOI: 10.1016/j.jeconbus.2016.12.001
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    Cited by:

    1. Eduardo Minuci & Scott Schuh, 2022. "Are West Virginia Banks Unique?," Working Papers 22-03, Department of Economics, West Virginia University.
    2. Amit Ghosh & Salvador Contreras, 2022. "Local Banking Market Frictions and Youth Crime: Evidence from Bank Failures," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(1), pages 43-75, February.
    3. Luisa Blanco & Salvador Contreras & Amit Ghosh, 2022. "Impact of Great Recession bank failures on use of financial services among racial/ethnic and income groups," Southern Economic Journal, John Wiley & Sons, vol. 88(4), pages 1574-1598, April.
    4. Qiongbing Wu & Rebel A. Cole, 2024. "Macroeconomic conditions and bank failure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(5), pages 1212-1234, August.
    5. Ghosh, Amit, 2017. "Sector-specific analysis of non-performing loans in the US banking system and their macroeconomic impact," Journal of Economics and Business, Elsevier, vol. 93(C), pages 29-45.

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    More about this item

    Keywords

    Bank failures; Credit crunch channel; Bank balance sheet; Sector-specific state-level GDP and labor markets; Fixed-effects estimations; Panel VAR;
    All these keywords.

    JEL classification:

    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • 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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