Predicting the US bank failure: A discriminant analysis

Abstract

Using discriminant analysis, we trace the US bank failures during the period from 2007 to 2010 to poor investment decisions and large exposure to systemic risk channels. Specifically, we find that the proportion of illiquid loans in their books and the exposure to the interbank funding markets are the main predictors of bank failures. There are indicators that distinguish surviving banks from their failed peers, and these indicators serve as the early warning signals that predict banking failures. This study provides regulators and bank management forecast signals of financial exigency.