Bank Failure: Evidence from the Colombia Financial Crisis
CAE Working Paper No. 06-12
27 Pages Posted: 12 Jan 2007
Date Written: October 2006
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
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