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Drivers of US Bank Failures during the Financial Crisis

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  • Raymond Cox
  • Randall Kimmel
  • Grace Wang

Abstract

Hundreds of banks failed during the financial crisis of 2008 to 2010 causing significant social cost and enfeebling economic growth for years following. In the aftermath of the crisis, regulators responded, as always, with new regulations, the efficacy of which is debatable. For policy makers to enact effective regulation, they must understand the true cause of bank failures during crisis periods. We study the effects of 31 variables using univariate t-tests and probit regression to determine their influence on the probability of bank failure. We find that banks failed during the 2008 to 2010 financial crisis because of choices management made to accept more risk, specifically by having higher financial leverage, investing in higher risk loans in real estate and construction and by holding less liquid assets and fewer low risk loans like single family real estate loans. That is, the cause of US bank failures during the finance crisis was poor management.

Suggested Citation

  • Raymond Cox & Randall Kimmel & Grace Wang, 2017. "Drivers of US Bank Failures during the Financial Crisis," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(8), pages 1-19, July.
    • Handle: RePEc:ibn:ijbmjn:v:12:y:2017:i:8:p:19
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    References listed on IDEAS

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    3. Sinkey, Joseph F, Jr, 1978. "Identifying "Problem" Banks: How Do the Banking Authorities Measure a Bank's Risk Exposure?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 184-193, May.
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    5. Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 121-139, January.
    6. Sinkey, Joseph F., 1977. "Identifying Large Problem/Failed Banks: The Case of Franklin National Bank of New York," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(5), pages 779-800, December.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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