How Predictable Were the Bank Failures of 2008?

We examine the time series behavior of the stock prices and bond yields of a set of large banks and financial institutions that failed or were taken over in distress in 2008. We find evidence that both the risk-neutral probability of default implied by bond yields and the steady decline in stock prices preceded the eventual defaults by several quarters. Our results are consistent with the model of Berkowitz, Kumar and Langberg (2009) and support the view that statistical warning signs may have been available to regulators with a substantial lead time.

Keywords: bank failure, predictability, default probability, financial crisis

JEL Classification: G21, G17, G33

Suggested Citation: Suggested Citation

Berkowitz, Jeremy and Kumar, Praveen and Langberg, Nisan, How Predictable Were the Bank Failures of 2008? (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364200 or http://dx.doi.org/10.2139/ssrn.1364200