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Do financial crises cleanse the banking industry? Evidence from US commercial bank exits

Laima Spokeviciute, Kevin Keasey and Francesco Vallascas

Journal of Banking & Finance, 2019, vol. 99, issue C, 222-236

Abstract: We examine the cleansing effect of financial crises via their contribution to the exit of inefficient US commercial banks from 1984 to 2013. We find a larger increase in the exit likelihood of less efficient banks as compared to more efficient banks in the years of the Savings and Loans Crisis but not during the Global Financial Crisis. We highlight how the magnitude of the shock of the Global Financial Crisis and the subsequent, broad government interventions might explain these different results. Furthermore, we highlight that both crisis periods have a disproportionate effect on young banks regardless of their efficiency levels and that they do not generate any positive spillover effects on surviving banks in the three years post-crises in spite of some reallocation benefits in favor of new entry banks. Our findings highlight that forms of prudential regulation designed to strengthen bank resilience in good times might contribute to mitigating the effects of crisis on the longer-term productivity of the banking industry.

Keywords: Financial crises; Bank efficiency; Bank exits (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jbfina:v:99:y:2019:i:c:p:222-236