Macroeconomic conditions and bank failure

Abstract

Utilizing a simple time-varying hazard model, we incorporate nationwide and state-level economic variables with banking-industry and bank-level data to examine U.S. bank failures during 1977–2019. We find that bank-level financial conditions are more essential in predicting bank failure, although macro factors affect the failure likelihood of vulnerable banks. We also find that banking-industry market variables are significant predictors. Unlike bank systemic funding cost whose predictive power is subsumed in the presence of macroeconomic variables, banking-industry market performance has a significantly independent predictive power on bank failure. This finding is novel to existing literature of bank-failure forecast and has important policy implications.