Bank structure and failure during the financial crisis

Abstract

Purpose – This paper aims to examine the impact of charter type (national vs state), holding company structure, andmeasures of bank fragility on the likelihood of bank failure during the late 2000s financial crisis. Design/methodology/approach – The study estimates a series of logit regressions in an effort to identify the causes of failure and assess the role of the bank-level characteristics while controlling for the economic and regulatory environment. Findings – The empirical results indicate that established institutions were more likely to fail, dependent uponwhether a bank received bailout funds or not, if theywere relatively large, had relatively lowcapital ratios, had relatively lowliquidity, reliedmore heavily on brokered deposits, held a relatively large portfolio of real estate loans, had a relatively large proportion of non performing loans, and had less income diversity. Consistent with being financially fragile, de novo banks and those banks that grew substantially prior to the crisis faced an increased likelihood of failure relative to established banks. However, capital levels were not significantly related to the likelihood of failure in de novo institutions. Originality/value – This paper provides a comprehensive analysis of the possible business models’ impact on the likelihood of failure during the recent financial crisis. It contributes to the ongoing debate regarding appropriate regulatory reform in the banking industry by shedding light on the extent towhich thebusinessmodeldecisionsmadebybankmanagershaveanimpactonthe stabilityof thebankingsystem