Bank Failure: Evidence from the Colombian Financial Crisis

Abstract:     
Bank-specific determinants of bank failure during the financial crisis in Colombia are identified and studied using duration analysis. The process of failure of banks and related financial institutions during that period can be explained by differences in financial health and prudence across institutions. The capitalization ratio is the most significant indicator explaining bank failure. Increases in this ratio lead to a reduction in the hazard rate of failure at any given moment in time. This ratio exhibits a non-linear component. At lower levels of capitalization small differences in capitalization are associated with larger differences in failure rates. Our results thus provide empirical support for existing regulatory practice.

Other important variables explaining bank failure dynamics are the bank's size and profitability.

Number of Pages in PDF File: 17

Keywords: Financial institutions, bankruptcy, liquidation, capitalization, supervision, duration

JEL Classification: C41, E4, E58, G21, G23, G38

Accepted Paper Series