Authors: Sergio Correia, Stephan Luck, and Emil Verner
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Staff Reports
Failing Banks
Number 1117
September 2024
September 2024
JEL classification: G01, G21, N20, N24
Why do banks fail? We create a panel covering most commercial banks from 1865 through 2023 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 non-core funding. Commonalities across failing banks imply that failures are highly predictable using simple accounting metrics from publicly available financial statements. Predictability is high even in the absence of deposit insurance, when depositor runs were common. Bank-level fundamentals also forecast aggregate waves of bank failures during systemic banking crises. Altogether, our evidence suggests that the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals. Bank runs can be rejected as a plausible cause of failure for most failures in the history of the U.S. and are most commonly a consequence of imminent failure. Depositors tend to be slow to react to an increased risk of bank failure, even in the absence of deposit insurance.
Author Disclosure Statement(s)
Sergio Correia
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Stephan Luck
I declare that I have no relevant or material financial interests that relate to the research described in this paper (Failing Banks). Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Emil Verner
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Stephan Luck
I declare that I have no relevant or material financial interests that relate to the research described in this paper (Failing Banks). Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Emil Verner
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Suggested Citation:
Correia, Sergio, Stephan Luck, and Emil Verner. 2024. “Failing Banks.” Federal Reserve Bank of New York Staff Reports, no. 1117, September. https://doi.org/10.59576/sr.1117
Correia, Sergio, Stephan Luck, and Emil Verner. 2024. “Failing Banks.” Federal Reserve Bank of New York Staff Reports, no. 1117, September. https://doi.org/10.59576/sr.1117
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