The Bank Failure Rate, Economic Conditions and Banking Statutes in the U.S., 1970-2009
Cebula, Richard J., Koch, James V., Fenili, Robert N., Atlantic Economic Journal
In the U.S., not since the years of the Great Depression had the regulatory authorities closed so many commercial banks as they did during the period of the 1980s and the early 1990s. Indeed, over the period from 1943 through 1981, relatively few banks were closed because of insolvency. However, this situation changed very dramatically beginning with the year 1982, during which 42 banks were closed, followed by 48 closings in 1983 and 79 closings in 1984. The number of closed banks increased sharply thereafter, surpassing 100 closings per year through the early 1990s (Federal Deposit Insurance Corporation 1995). In point of fact, the bank closing rate did not decline significantly until after the implementation of the various provisions of FDICIA, the Federal Deposit Insurance Corporation Improvement Act of 1991 (Benston and Kaufman 1997; Cebula 1996, 1999).
Nevertheless, beginning in 1998 and 1999, the bank failure rate began to climb again, with the failure rate accelerating in 2008, 2009, and 2010. In 2008, 25 banks were closed. This number jumped to 140 bank failures in 2009 and to 139 only three-fourths of the way through 2010. Given the significance of bank failures for the overall health and stability of the economy, this increased bank failure rate is problematic, as reflected in the massive "bailout" measures undertaken during 2008 by the Bush Administration and by the Obama Administration in 2009. Indeed, it would seem appropriate to revisit the issue and attempt to identify key factors, including (a) economic and financial market factors on the one hand, and (b) major federal banking statutes such as FDICIA and the RNIBA (the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994), that might have influenced bank failures in the U.S., not only in the latter part of the 20th century but in more recent years as well.
Accordingly, the purpose of this empirical study is to identify key economic, financial, and statutory determinants of U.S. bank failures for the period 1970 through 2009 with a particular focus on any evidence as to whether these two statutes (FDICIA and RNIBA) exercised impacts on bank failures. The next section of this study provides the basic model. The empirical model and results are provided and discussed in the subsequent section of the study, with the FDICIA and RNIBA statutes--since they were far more recently enacted--being the principal statutory focus. The closing section of this study provides the preliminary conclusions.
For purposes of this study, a bank failure occurs when a bank is forced by regulators either to close or to merge with another banking institution. This study adopts an eclectic bank-failure model based to some extent on earlier related studies (Amos 1992; Barth and Brumbaugh 1992; Barth et al. 1992; Benston and Kaufman 1997; Bradley and Jansen 1986; Cebula and Belton 1994; Chao and Cebula 1996; Gropp et al. 2006; Saltz 1994; Wheelock and Wilson 2000; Cebula 2010). However, this study differs from previous studies in the following ways: (a) it runs through the year 2009 and, thus, is more current; (b) it accounts explicitly for the impacts not only of FDICIA (as in Cebula 1996, 1999; Benston and Kaufman 1997), but also for the potential impacts of the RNIBA.
This eclectic study follows several earlier related studies (Amos 1992; Barth et al. 1992; Cargill and Garcia 1985; Cebula 1996; Saltz 1994; Wheelock and Wilson 2000; Cebula 2010) by including a number of economic/financial variables. These variables include the percentage growth rate of real GDP (Y), which is adopted in order to reflect the overall performance of the economy. The stronger the performance of the economy, as reflected in this study by a higher value of Y, the better the performance of bank loan portfolios and, as a result, the lower the likelihood of bank failures (Amos 1992; Barth et al. 1992). Next, the higher the cost of funds for banks (COST), the lower bank profitability and, over time, the greater the probability of bank failures (Bradley and Jansen 1986; Barth et al. …