🤖 AI Summary
This study challenges the prevailing “panic-driven failure” narrative regarding U.S. bank failures by investigating their fundamental causes. Method: Leveraging a comprehensive panel dataset of U.S. commercial banks spanning 1863–2024, the paper employs panel regressions, event-study analysis, and dynamic accounting metrics—including asset loss rates, capital adequacy ratios, and reliance on non-core funding—to systematically identify pre-failure indicators. Contribution/Results: Findings reveal that bank failures are almost invariably preceded by persistent deterioration in fundamentals: declining asset quality, eroding solvency, and sharply rising funding costs. Even prior to federal deposit insurance, runs were strongly associated with weak fundamentals—not with irrational, fundamentals-agnostic panic. Low asset recovery rates further corroborate insolvency. This study provides the first ultra-long-run panel evidence refuting the “non-fundamentals-driven run” hypothesis and demonstrates that publicly available financial indicators alone enable high-accuracy prediction of failure risk.
📝 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.
