Risk taking by US banks led to their failures

Grace Wang and Raymond Cox

International Journal of Financial Services Management, 2013, vol. 6, issue 1, 39-59

Abstract: This research studies why commercial banks in the USA failed in the recent financial crisis from the aspect of risk taking by the financial institutions. First, lending risks come from the choice of illiquid assets that affect the quality of loans. Second, risk of securitisation is rooted in the implicit recourse, backstop of liquidity, balance sheet overexpansion, and the moral hazard problem. Third, the systemic risk from the overall economic conditions was ubiquitous when market liquidity intertwined with the funding liquidity. Indicators are provided that distinguish surviving banks from their failed peers which serve as the early warning signals that predict banking failures. Given that, this study provides policy options which will contribute to greater stability in the banking sector in a future financial market and economic crisis.

Keywords: bank failures; warning systems; financial services; risk taking; US banks; banking industry; USA; United States; commercial banks; financial crisis; lending risks; illiquid assets; loan quality; securitisation risk; implicit recourse; liquidity backstop; balance sheet overexpansion; moral hazard; systemic risk. (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.inderscience.com/link.php?id=52877 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ids:ijfsmg:v:6:y:2013:i:1:p:39-59

Access Statistics for this article

More articles in International Journal of Financial Services Management from Inderscience Enterprises Ltd
Bibliographic data for series maintained by Sarah Parker (informationadministrator5@inderscience.com).