Troubling Times for the Commercial Banker: Exploring the Recent Wave of Failures

That the United States and the world experienced a major financial crisis and is still struggling to recover comes as no surprise to most. Less well known is the fact that over 400 commercial banks and thrifts have failed in the U.S. since 2008. This paper attempts to understand why so many banks are failing and why they are failing in an uneven pattern across the country. Indeed, over 65 percent of all commercial bank failures since 2008 are concentrated in only six states. Contrary to popular perception, we do not find evidence that mortgage-backed securities or the performance of real estate loans contributed to the probability of failure. We do find that banks in those six states failed because of inadequate capital, off-balance sheet activity, falling core deposits and an increased reliance on brokered deposits. Further, local population growth, unemployment and falling home prices also explain the probability of failure. We also find that the twenty-first century failed banks were younger and larger than surviving banks. Taken together, it appears that banks today are failing largely because of the local market conditions and demographics regarding the age and size of the institution.