Failing Banks

Sergio Correia, Stephan Luck and Emil Verner

No 25-04, Working Paper from Federal Reserve Bank of Richmond

Abstract: Why do banks fail? We create a panel covering most commercial banks from 1863 through 2024 to study the history of failing banks in the United States. Failing banks are characterized by rising asset losses, deteriorating solvency, and an increasing reliance on expensive noncore funding. These commonalities imply that bank failures are highly predictable using simple accounting metrics from publicly available financial statements. Failures with runs were common before deposit insurance, but these failures are strongly related to weak fundamentals, casting doubt on the importance of non-fundamental runs. Furthermore, low recovery rates on failed banks' assets suggest that most failed banks were fundamentally insolvent, barring strong assumptions about the value destruction of receiverships. Altogether, our evidence suggests that the primary cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals.

Keywords: Bank failure; Banking History; banking fundamentals (search for similar items in EconPapers)
JEL-codes: G01 G21 N20 N24 (search for similar items in EconPapers)
Pages: 122
Date: 2025-06-09
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Working Paper: Failing Banks (2024)
Working Paper: Failing Banks (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedrwp:101149

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DOI: 10.21144/wp25-04

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