Abstract
Bank solvency questions and bank failures in the U.S. have become issues of renewed concern in recent years. Given the significance of bank solvency and bank failures for the health and stability of the U.S. economy, it is imperative to have insights into those factors that systematically influence bank failures. Accordingly, this empirical study seeks to identify those factors influencing the bank failure rate in the U.S. over the period 1970 through 2008, with emphasis on: (1) recent major banking statutes, including: the Community Reinvestment Act of 1977, CRA, the Federal Deposit Insurance Corporation Improvement Act of 1991, FDICIA, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, RNIBA, and the Gramm-Leach-Bliley Act, GLB Act; (2) the health of the housing market; and (3) general economic and financial market conditions. The GARCH estimates indicate that FDICIA acted to reduce bank failures, whereas (presumably by increasing competition and/or increasing costs through branch bank expansion) RNIBA induced a net increase in bank failures in the U.S. The GARCH evidence implies that the CRA also led to increased bank failures in the U.S., arguably by exposing banks to greater credit risk. The evidence also indicates that the GLB Act may also have acted to induce more bank failures. Furthermore, a stronger housing market was found to reduce bank failures, whereas a stronger economy as well as more favorable interest rate conditions reduced bank failures.
Highlights
Questions regarding bank solvency and bank failures in the U.S have become issues of renewed concern in recent years, especially in view of the “Great Recession.” In this context, it is noteworthy that not since the years of the Great Depression had the U.S government regulatory authorities closed so many banks as they did during the 1980s and early 1990s
For purposes of this study, a bank failure occurs when a bank is forced by regulators either to close or to merge with another banking institution
The bank failure rate was found to be reduced as a result of implementation of provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Benston & Kaufman, 1997; Cebula, 1996, 1999)
Summary
Questions regarding bank solvency and bank failures in the U.S have become issues of renewed concern in recent years, especially in view of the “Great Recession.” In this context, it is noteworthy that not since the years of the Great Depression had the U.S government regulatory authorities closed so many banks as they did during the 1980s and early 1990s. Questions regarding bank solvency and bank failures in the U.S have become issues of renewed concern in recent years, especially in view of the “Great Recession.”. In this context, it is noteworthy that not since the years of the Great Depression had the U.S government regulatory authorities closed so many banks as they did during the 1980s and early 1990s. The bank closing rate did not decline significantly until after the implementation of the provisions of FDICIA, the Federal Deposit Insurance Corporation Improvement Act of 1991 (Benston & Kaufman, 1997; Cebula, 1996, 1999).
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