Credit Risk Determinants of Bank Failure: Evidence from US Bank Failure

Abstract

This paper empirically determines the significant determinants, among credit risk variables, of US bank failure. Applying the Probit Model the paper finds that among the five credit risk variables, the credit loss provision to net charge off, loan loss allowance to non-current loans, and non-current loans to loans are significant for predicting bank failures. These factors predict 76.8 percent to 77.25 of total observation correctly. The model predicts 97 out of 121 failures i.e. 80.17 percent correctly. Net charge off to loans and loan loss to non-current loans, though most reliable measures, are not significant predictors for the US bank failures during 2009.