Macroeconomic conditions and bank failure

Abstract

AbstractUtilizing a simple time‐varying hazard model, we incorporate nationwide and state‐level economic variables with banking‐industry and bank‐level data to examine U.S. bank failures during 1977–2019. We find that bank‐level financial conditions are more essential in predicting bank failure, although macro factors affect the failure likelihood of vulnerable banks. We also find that banking‐industry market variables are significant predictors. Unlike bank systemic funding cost whose predictive power is subsumed in the presence of macroeconomic variables, banking‐industry market performance has a significantly independent predictive power on bank failure. This finding is novel to existing literature of bank‐failure forecast and has important policy implications.