Uncertain Times and Early Predictions of Bank Failure
19 Pages Posted: 9 Oct 2020
Date Written: November 2020
The Great Financial Crisis shows that bank failure in the United States, while rare, is a concern during uncertain times. Interest here is in the ability to predict future failures at the start of a crisis, when the recent past has few events on which to base inferences. I show that policy makers using estimates based on the Savings and Loans crisis would identify in early 2009 that 2.0% of banks were in critical condition and 7.0% were unhealthy. This is comparable to the 1.7% of banks that failed within a year and the 3.9% of banks that would fail during the crisis.
Keywords: bank failure, banking crisis, Bayesian model averaging, prediction
JEL Classification: G17, G21, G28
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