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Risk taking by US banks led to their failures

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  • Grace W.Y. Wang
  • Raymond A.K. Cox

Abstract

This research studies why commercial banks in the USA failed in the recent financial crisis from the aspect of risk taking by the financial institutions. First, lending risks come from the choice of illiquid assets that affect the quality of loans. Second, risk of securitisation is rooted in the implicit recourse, backstop of liquidity, balance sheet overexpansion, and the moral hazard problem. Third, the systemic risk from the overall economic conditions was ubiquitous when market liquidity intertwined with the funding liquidity. Indicators are provided that distinguish surviving banks from their failed peers which serve as the early warning signals that predict banking failures. Given that, this study provides policy options which will contribute to greater stability in the banking sector in a future financial market and economic crisis.

Suggested Citation

  • Grace W.Y. Wang & Raymond A.K. Cox, 2013. "Risk taking by US banks led to their failures," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 6(1), pages 39-59.
    • Handle: RePEc:ids:ijfsmg:v:6:y:2013:i:1:p:39-59
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    Citations

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    Cited by:

    1. James R. Barth & Wenling Lu & Yanfei Sun, 2020. "Regulatory Restrictions on US Bank Funding Sources: A Review of the Treatment of Brokered Deposits," JRFM, MDPI, vol. 13(6), pages 1-27, June.
    2. Kristóf, Tamás & Virág, Miklós, 2022. "EU-27 bank failure prediction with C5.0 decision trees and deep learning neural networks," Research in International Business and Finance, Elsevier, vol. 61(C).
    3. Raymond A. K. Cox & Randall K. Kimmel & Grace W.Y. Wang, 2017. "Proportional Hazards Model of Bank Failure: Evidence from USA," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 5(3), pages 35-45, June.

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