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Troubled Banks: Why Don't They All Fail?

Federal Deposit Insurance Corporation September 22, 2018

In this paper we examine troubled banks those that receive a poor safety and soundness rating when examined in order to predict future bank state Besides failure, we see three alternative outcomes for these banks recovery, acquisition, or continuation as a problem The determinants of bank failure have been much researched, as has failure prediction Most of this researcIn this paper we examine troubled banks those that receive a poor safety and soundness rating when examined in order to predict future bank state Besides failure, we see three alternative outcomes for these banks recovery, acquisition, or continuation as a problem The determinants of bank failure have been much researched, as has failure prediction Most of this research uses a binary approach, dividing banks into two groups those that fail and those that do not or predicting one of two states failure or nonfailure Because our sample contains only troubled banks, we can go beyond a two state approach First we use univariate trend analysis to determine whether financial variables differ within this group of banks depending on the banks future states This analysis suggests that meaningful relationships exist between these future states and prior period financial conditions We then use financial ratios as explanatory variables in a unified model of bank states, with the goal of improving predictions of future bank condition We gauge the model s effectiveness by testing the out of sample forecasting accuracy Our results show that our model compares favorably with the standard binary failure prediction model, yet has the added feature of predicting recovery, merger, or continuation as a problem bank.


  • Title: Troubled Banks: Why Don't They All Fail?
  • Author: Federal Deposit Insurance Corporation
  • ISBN: 9781514205051
  • Page: 456
  • Format: Paperback
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      456 Federal Deposit Insurance Corporation
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      Posted by:Federal Deposit Insurance Corporation
      Published :2018-09-22T11:04:09+00:00