Failing Banks

91 Pages Posted: 8 Dec 2023 Last revised: 3 Apr 2024

See all articles by Sergio Correia

Sergio Correia

Board of Governors of the Federal Reserve System

Stephan Luck

Federal Reserve Bank of New York

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: March 22, 2024

Abstract

Why do banks fail? We create a panel covering most commercial banks from 1863 through 2023 and study the history of failing banks in the United States. Failing banks are characterized by rising asset losses. Losses are typically preceded by rapid lending growth, financed by non-core funding. Bank failures, including those that involve depositor runs, are highly predictable based on bank fundamentals, even in the absence of deposit insurance and a central bank. We construct a new measure of systemic risk using bank-level fundamentals and show that it forecasts the major waves of banking failures in U.S. history. Altogether, our evidence suggests that failures caused by runs on healthy banks are uncommon. Rather, the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals.

Keywords: bank failures, financial crises

JEL Classification: G01, G21, N20, N24

Suggested Citation

Correia, Sergio and Luck, Stephan and Verner, Emil, Failing Banks (March 22, 2024). Available at SSRN: https://ssrn.com/abstract=4650834 or http://dx.doi.org/10.2139/ssrn.4650834

Sergio Correia

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephan Luck

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emil Verner (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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