Do bank failure rates reflect state banking and economic conditions? An analysis across US states

Abstract

Understanding the determinants of bank failures is extremely important in the post financial crisis-era for both bank managers as well as regional banking regulatory authorities. Using state-level data spanning the period 1980–2014 across all 50 states and District of Columbia, the present study examines the impact of state-banking and economic conditions on bank failure rates (BFRs) for both commercial banks and savings institutions. Using both fixed effects and GMM estimations, I find greater capitalisation, overhead costs, liquidity and bank profits to lower BFRs while inferior credit quality, diversification, industry size, net charge-offs and non-performing loans increase BFRs. Moreover increases in commercial and industrial loans, individual and single-family residential loans reduce BFRs. On the other hand, multi-family residential, non-farmland, construction and land development loans increase BFRs. Finally, increases in state housing prices, state personal income and reduction in state unemployment rates lower BFRs.