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Why Do Banks Fail? The Predictability of Bank Failures

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Abstract

Can bank failures be predicted before they happen? In a previous post, we established three facts about failing banks that indicated that failing banks experience deteriorating fundamentals many years ahead of their failure and across a broad range of institutional settings. In this post, we document that bank failures are remarkably predictable based on simple accounting metrics from publicly available financial statements that measure a bank’s insolvency risk and funding vulnerabilities.

Suggested Citation

  • Sergio A. Correia & Stephan Luck & Emil Verner, 2024. "Why Do Banks Fail? The Predictability of Bank Failures," Liberty Street Economics 20241122, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:99163
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    File URL: https://libertystreeteconomics.newyorkfed.org/2024/11/why-do-banks-fail-the-predictability-of-bank-failures/
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    More about this item

    Keywords

    bank runs; financial crises; deposit insurance; bank failures;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services

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