Why Do Some Troubled Banks Fail Instead of Merge?

Most troubled banks do not fail, even during a financial crisis. If a troubled bank fails, it enters the Federal Deposit Insurance Corporation (FDIC) resolution process, imposing a cost on the deposit insurance fund. The FDIC closely monitors troubled banks and encourages management to resolve issues, including seeking a merger partner. Why can some troubled banks merge while others cannot prevent failure? We compare merged banks (over 4,000) with failed banks (466) during 2001-2019 and find that they differ in almost all aspects going back several years before the merger or failure. Using a sub-sample of failed and merged banks matched on early signs of impending failures (construction loans, asset growth, brokered deposits, capital, experience), we show that the troubled merged banks made better decisions relating to cost (labor and funding), and risk management (market risk and non-real estate related credit risk), making them attractive merger targets.

Keywords: G21, bank failure, CAMELS, commercial real estate, FDIC, financial crisis, mortgage-backed security, risk-based capital, risk weights, mergers, assisted mergers, g33, g34, m41

Suggested Citation: Suggested Citation

Bhat, Gauri and Hanna, J. Douglas and Shaw, Wayne H., Why Do Some Troubled Banks Fail Instead of Merge? (August 22, 2024). SMU Cox School of Business Research Paper No. 24-20, Available at SSRN: https://ssrn.com/abstract=4933602 or http://dx.doi.org/10.2139/ssrn.4933602