Virtual bank failures: an investigation

Abstract

PurposeThe purpose of this paper is to identify the causes behind the failures of virtual banks. This work underscores the importance of the differing financial metrics in the virtual and brick and mortar banking channels, when analyzing bank failures.Design/methodology/approach“Probit” analysis on the failed virtual banks and the failed brick and mortar banks revealed that the interest incomes in both banks are significantly different. The non‐interest income and non‐interest expense (NIE) of the surviving banks and the failed banks are explored to examine the causes for failure.FindingsSimilar to previous research it was found that the brick and mortar banks failed due to bad asset quality, but the failure of virtual banks is mainly due to high NIEs. For virtual banks to succeed, the institutions must focus on controlling the burden.Research limitations/implicationsA larger sample size would have been preferable and non‐availability of data limited the scope of the study. Continuing studies could explore the performance of Internet channels of existing brick and mortar banks.Practical implicationsThis study accentuates the importance of the differing business models underlying the two banking channels (virtual banks and brick and mortar banks). These channel specific differences underscore the significance of the financial metrics in operational evaluation.Originality/valueThis is probably the first study to examine the causes of failures of virtual banks and contrast them with brick and mortar banks.