Bank Failure and the Financial Crisis: An Econometric Analysis of U.S. Banks
32 Pages Posted: 6 Dec 2015
Date Written: December 4, 2015
The analysis of bank failures enables the understanding of the relevant financial and economic factors underlying the bank’s solvability and survival in a sound and competitive banking system, allowing a preventive behavior for bank management and regulators.
This research is focused on the study of banks’ failures and on the understanding of the crisis period specificities. The study identifies the main determinants that divide banks in a good financial situation from those in a bad one, thus providing us with the instruments needed to avoid the limit situation of bankruptcy. A great span of variables is used, including the very well documented literature set of CAMELS – Capital, Assets quality, Management, Earnings, Liquidity, Sensitivity to market risk, and other non-CAMEL variables such as credit risk, tax, growth and size.
The data panel used in this research was collected from the Federal Deposit Insurance Corporation (FDIC) statistics on depository institutions, comprising 11.121 banks from 2000 to 2014, including the crisis subsample which presents a higher number of failures, from 2008 to 2014.
The methodology joins Principal Components Analysis, intending to select non-redundant variables, and the Logistic Regression, allowing the identification of variables that reveal statistical explicative power.
The research findings point out the consistent role of CAMEL indicators during both the broadest period of analysis and, more specifically, the crisis period of financial instability. Furthermore, during the financial crisis, a relevant impact of the Management Quality factor is noticed, as well as the arising of the capital growth indicator, the latter being a vehicle to finance losses and maintain credibility.
Keywords: Bank Failure, Financial Crisis, CAMELS, Principal Components Analysis, Logistic Regression
JEL Classification: G01, G21, G28, G33
Suggested Citation: Suggested Citation