Bank Failure: Evidence from the Colombia Financial Crisis

CAE Working Paper No. 06-12

27 Pages Posted: 12 Jan 2007

See all articles by Nicholas M. Kiefer

Nicholas M. Kiefer

Cornell University - Department of Economics

Jose E Gomez-Gonzalez

Banco de la Republica

Date Written: October 2006

Abstract

This paper identifies the main bank specific determinants of bank failure during the financial crisis in Colombia using duration analysis. Using partial likelihood estimation, it shows that the process of failure of financial institutions during that period can be explained by differences in financial health and prudence across institutions. The capitalization ratio is the most significant indicator explaining bank failure. Increases in this ratio lead to a reduction in the hazard rate of failure at any given moment in time. Of special relevance, this ratio exhibits a non-linear component. Our results thus provide empirical support for existing regulatory practice. Other important variables explaining bank failure dynamics are bank's size and profitability.

Keywords: Financial institutions, bankruptcy, liquidation, capitalization, supervision, duration hazard function

JEL Classification: C41, E4, E58, G21, G23, G38

Suggested Citation

Kiefer, Nicholas M. and Gomez-Gonzalez, Jose Eduardo, Bank Failure: Evidence from the Colombia Financial Crisis (October 2006). CAE Working Paper No. 06-12, Available at SSRN: https://ssrn.com/abstract=956630 or http://dx.doi.org/10.2139/ssrn.956630

Nicholas M. Kiefer (Contact Author)

Cornell University - Department of Economics ( email )

490 Uris Hall
Ithaca, NY 14853-7601
United States

Jose Eduardo Gomez-Gonzalez

Banco de la Republica ( email )

Carrera 7 #14-78
Bogota
Colombia

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