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Contagion effects of the bank of new England's failure

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  • Jeff Madura
  • Kenneth Bartunek

Abstract

This paper considers the effects of the Bank of New England's failure on other banks. It is hypothesized that the more a bank's asset portfolio resembles that of the Bank of New England the more negative the response should be. The responses of different bank groups are considered, as a major factor in the Bank of New England's failure was a decline in real estate values which is often a regionalized phenomenon, over a series of announcements on the Bank of New England using a seemingly unrelated regression framework. The evidence indicates that some announcements cause bank share prices to decline significantly, particularly those in the New England area which may be expected to have asset portfolios which most closely resemble that of the Bank of New England. Finally, a cross‐sectional regression is used to determine if the bank's responses to the announcements are related to their loan to asset or capital to asset ratios. Only the latter appear to be significant for a few announcements.

Suggested Citation

  • Jeff Madura & Kenneth Bartunek, 1994. "Contagion effects of the bank of new England's failure," Review of Financial Economics, John Wiley & Sons, vol. 4(1), pages 25-37, September.
    • Handle: RePEc:wly:revfec:v:4:y:1994:i:1:p:25-37
    DOI: 10.1016/1058-3300(94)90003-5
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    Cited by:

    1. Elijah Brewer & Hesna Genay & William C. Hunter & George G. Kaufman, 1999. "Does the Japanese stock market price bank risk? evidence from financial firm failures," Working Paper Series WP-99-31, Federal Reserve Bank of Chicago.

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