Factors related to the failure of FDIC-insured US banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mario Jordi Maura-Pérez ◽  
Herminio Romero-Perez
Keyword(s):  
Deposit Insurance ◽  
Capital Adequacy ◽  
Bank Failures ◽  
Main Hypothesis ◽  
Content Type ◽  
Explanatory Factors ◽  
Selection Strategies ◽  
Capital Ratios ◽  
The 2008 Financial Crisis ◽  
Federal Deposit Insurance

Purpose This study aims to analyze the factors related to the failure of 535 Federal Deposit Insurance Corporation (FDIC)-Insured United States banks in conjunction with the 2008 financial crisis. Design/methodology/approach The research consists of an analysis of the following three five-year partitions: pre-crisis (2002–2006), crisis (2007–2011) and post-crisis (2012–2016). The main hypothesis is that the factors explaining bank failures vary by period. Using logistic regression analysis, the authors identify the desirable models by period based on three model selection strategies. Findings Liquidity and non-risk-based capital ratios are important explanatory factors in all three periods. As the authors can see from the results, when comparing the full period (2002–2016) and the three five-year period partitions (2002–2006, 2007–2011 and 2012–2016), the ratios change from period to period, but they measure the same financial areas of concern in different contexts as follows: liquidity, leverage/risk exposure and capital adequacy. Risk-based capital ratios are not effective predictors of bank failures. Originality/value Recent academic studies have analyzed bank failures during periods that cover the years before, during and after the crisis, but most of these studies discuss bank failures in the forecasting context only. This study includes an analysis of failure determinants during pre-crisis, crisis and post-crisis subperiods based on the FDIC monitoring system of bank failures and identifies what ratios are more relevant during each period and how they change from period to period.

scholarly journals Bondholder reorganization of systemically important financial institutions

2018 ◽  
Vol 10 (2) ◽  
pp. 281-289 ◽  
Author(s):  
Steven D. Gjerstad
Keyword(s):  
Deposit Insurance ◽  
Financial Institution ◽  
Balance Sheet ◽  
Bank Failures ◽  
Content Type ◽  
Balance Sheets ◽  
Financial Firms ◽  
Resolution Process ◽  
Almost All ◽  
Federal Deposit Insurance

Purpose This paper aims to describe a resolution process for faltering financial firms that quickly allocates losses to bondholders and transfers ownership of the firm to them. This process overcomes the most serious flaws in resolution plans submitted by banks under Dodd–Frank Title I and in the Federal Deposit Insurance Corporation (FDIC) receivership procedure in Dodd–Frank Title II by restoring the balance sheet of a failing financial institution and immediately replacing the management and board of directors who allowed its demise. Design/methodology/approach Feasibility of the proposed resolution procedure is assessed by comparing long-term bonds outstanding for the largest American banks just before the 2008 crisis to the capital needed by these banks to restore their balance sheets after their losses prior to and during the crisis. Findings In almost all bank failures, this process would eliminate the need for government involvement beyond court certification of the reorganization. The procedure overcomes the serious incentive distortions and inefficiencies created by bailouts, and avoids the destruction of value and financial market turmoil that would result from the bankruptcies and liquidations that Dodd–Frank requires for distressed and failing banks. Originality/value Title II of the Dodd–Frank Act would require liquidation of any banks that enter into its resolution process. The case of Lehman Brothers indicates the severity of losses to investors that liquidation imposes and the disruption to financial markets and the economy. The procedure developed in this paper would avoid the disruptions that Dodd–Frank requires, preserving core functions of faltering financial firms and maintaining them as going concerns, even in a severe financial crisis.

Competitive aggressiveness, community banking and performance

2020 ◽  
Vol 13 (2) ◽  
pp. 221-240
Author(s):  
Jeff Stambaugh ◽  
G. T. Lumpkin ◽  
Ronald K. Mitchell ◽  
Keith Brigham ◽  
Claudia Cogliser
Keyword(s):  
Structural Equation ◽  
Deposit Insurance ◽  
Equation Modeling ◽  
Hierarchical Regression ◽  
Content Type ◽  
The Us ◽  
Competitive Aggressiveness ◽  
And Performance ◽  
Federal Deposit Insurance ◽  
Competitive Actions

PurposeThe purpose of this paper is to develop and empirically test a conceptualization of competitive aggressiveness (CA), a dimension of entrepreneurial orientation.Design/methodology/approachStructural equation modeling and hierarchical regression are employed on responses from 182 banks in the southwestern US Performance data on the banks are drawn from the US Federal Deposit Insurance Corporation's (FDIC's) Call reports.FindingsThe results indicate awareness, motivation and capability are antecedents of CA, which itself is positively related to increased market share and, in more dense markets, profitability.Practical implicationsAggressive firms exhibit certain routines that can lead to competitive actions, which assists performance in some contexts. Managers who wish to increase (or decrease) their firms' overall competitive posture can encourage (or discourage) employees from performing competitive routines such as monitoring their rivals or talking about their rivals' strategies.Originality/valueBy developing CA' conceptualization, the study advances the understanding of the antecedents of competitive behavior and makes it easier to study competition in smaller firms.

The effect of holding company affiliation on bank risk and the 2008 financial crisis

2017 ◽  
Vol 34 (1) ◽  
pp. 105-121 ◽  
Author(s):  
Krishnan Dandapani ◽  
Edward R. Lawrence ◽  
Fernando M. Patterson
Keyword(s):  
Financial Crisis ◽  
Univariate Analysis ◽  
Mortgage Lending ◽  
Capital Adequacy ◽  
2008 Financial Crisis ◽  
Content Type ◽  
Holding Company ◽  
The 2008 Financial Crisis ◽  
Home Mortgage ◽  
Level Of Risk

Purpose The organizational form of financial institutions is related to their level of risk, leverage, liquidity and capitalization. High level of risk and leverage and lower levels of liquidity and capitalization are considered to be the root causes of the 2008 financial crisis. The purpose of this paper is to investigate if banks affiliated to holding company structure contributed more to the root causes of crisis than unaffiliated banks. Design/methodology/approach The paper isolates the effect of holding company association by restricting the sample to one-bank holding companies and individual banks. A comparative analysis of independent and holding company-affiliated banks is performed. Univariate analysis and multivariate regressions are used to compare the risk, leverage, liquidity and capitalization of affiliated and independent banks. Findings The paper finds that holding company affiliation is linked to several root causes of the 2008 financial crisis. Specifically, holding company affiliation results in higher levels of home mortgage loans underwritten and underperforming, higher leverage, lower liquidity and lower capitalization for the subsidiary bank. Practical implications The paper demonstrates that affiliated banks use their higher leveraged positions to engage in riskier home mortgage lending, sacrificing both liquidity and capital adequacy. These findings can help policy makers to focus on the group of banks that are part of holding company affiliation and implement such policies and regulations so as to avoid any re-occurrence of financial crisis. Originality/value This paper is the first to link the structural differences in banks to the root causes of financial crisis and to isolate the effect of holding company affiliation through sample selection. The paper will be valued to other researchers who try to isolate the effect of holding company affiliation and those studying the causes of the financial crisis of 2008.

scholarly journals Fair premium rate of the deposit insurance system based on banks’ creditworthiness

2019 ◽  
Vol 36 (1) ◽  
pp. 8-31 ◽  
Author(s):  
Naoyuki Yoshino ◽  
Farhad Taghizadeh-Hesary ◽  
Farhad Nili
Keyword(s):  
Financial Institutions ◽  
Deposit Insurance ◽  
Credit Rating ◽  
Financial System ◽  
Insurance Premium ◽  
Capital Adequacy ◽  
Rate System ◽  
Content Type ◽  
Premium Rate ◽  
Fair Premium

Purpose Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at least a dual fair premium rate system based on creditworthiness of financial institutions, as considering singular premium system for all banks will have moral hazard. This paper aims to develop theoretical and empirical model for calculating dual fair premium rates. Design/methodology/approach The definition of a fair premium rate in this paper is a rate that covers the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, the authors use credit rating methods that use two major dimensional reduction techniques. For forecasting nonperforming loans (NPLs), the authors develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction model. Findings The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions, some banks show negative performance due to bank level reasons such as mismanagement or vice versa. The final results show that deposit insurance premium rate needs to be vary based on banks’ creditworthiness. Originality/value The results provide interesting insight for financial authorities to set fair deposit insurance premium rate. A high premium rate reduces the capital adequacy of individual financial institutions, which endangers the stability of the financial system; a low premium rate will reduce the security of the financial system.

Corporate governance structure and capital adequacy: implications to bank risk taking

2017 ◽  
Vol 13 (2) ◽  
pp. 165-185 ◽  
Author(s):  
Heba Abou-El-Sood
Keyword(s):  
Corporate Governance ◽  
Risk Taking ◽  
Good Governance ◽  
Balance Sheet ◽  
Governance Structure ◽  
Capital Adequacy ◽  
Outside Directors ◽  
Content Type ◽  
Bank Ownership ◽  
Capital Ratios

Purpose The purpose of this paper is to show the importance of policy discussions on the role of governance in limiting excessive risk-taking at times of turmoil. Design/methodology/approach Corporate governance measures are regressed on measures of risk taking using a sample of US bank holding companies (BHCs) during 2002-2014. Findings Results show that BHCs with more concentrated shareholders, more managerial ownership, smaller boards, and less outside directors undertake less risky investments with respect to total assets, loans, and off-balance-sheet items. Capital adequacy effect is overpowering pushing for more risky positions. Finally, banks with good governance push for less risky positions, even with larger capital ratios, during the financial crisis period relative to the precrisis boom. Practical implications This paper extends research on the association between bank ownership structure and risk taking. It adds to prior research by examining a key feature of banks, namely, their bank-specific capital adequacy. The relevance of this study stems from recent initiatives undertaken by the Basel Committee, the Group of Thirty (G30), and bank regulators to address deficient corporate governance structures that led to bank breakdowns. Originality/value One of the innovations of this paper is the use of risk-weighted measures to proxy for risk taking in banks, using risk weights used by bank regulators to adjust for operational risk, credit risk, and market risk.

A case study of XBRL implementation and development at the Federal Deposit Insurance Corporation (FDIC)

2020 ◽  
Vol 17 (2) ◽  
pp. 263-291
Author(s):  
Rania Mousa ◽  
Robert Pinsker
Keyword(s):  
Deposit Insurance ◽  
New Technologies ◽  
Public Information ◽  
Future Research ◽  
Research Approach ◽  
Content Type ◽  
Federal Deposit Insurance ◽  
The Impact ◽  
Federal Deposit Insurance Corporation

Purpose The purpose of this paper is to examine the implementation and development of eXtensible Business Reporting Language (XBRL) at the Federal Deposit Insurance Corporation (FDIC). The investigation seeks to gauge the roles and experiences of the FDIC and its main stakeholders to determine their engagement in XBRL diffusion within their organizations. Design/methodology/approach This is an qualitative research approach that is driven by the use of an in-depth case study and supported by the use of semi-structured interviews. Findings The findings showcase the role played by the FDIC as the first US regulatory authority that implemented and developed Inline XBRL. In addition, the use of diffusion of innovation theory provides better understanding of each stakeholder’s issues, benefits and challenges based on their experience. Research limitations/implications The research does not examine the institutionalization of XBRL at the FDIC or its stakeholders. Therefore, future research could incorporate a different research design to capture the impact of the pressure resulting from the regulatory mandate. Practical implications The research offers practical insights into public information technology managers and policymakers at global government agencies which are either non-adopters of XBRL technology or current adopters and consider transitioning into Inline XBRL. Global stakeholders could learn from the US experience and develop better understanding of Inline XBRL applications and functionalities. Originality/value The originality of this research is driven by the FDIC’s experience as the first regulatory developer of Inline XBRL. As such, the case study is a best practice to future and current adopters who often navigate the nuisance of implementing new technologies and/or developing existing ones.

Scoundrel or Scapegoat? A Reassessment of the Office of Thrift Supervision’s Performance Before the 2008 Financial Crisis

2015 ◽  
Vol 50 (10) ◽  
pp. 1396-1421 ◽  
Author(s):  
Justin Rex
Keyword(s):  
Financial Crisis ◽  
Federal Reserve ◽  
Deposit Insurance ◽  
The Other ◽  
2008 Financial Crisis ◽  
Financial Reforms ◽  
The 2008 Financial Crisis ◽  
Federal Deposit Insurance ◽  
Do So ◽  
Federal Deposit Insurance Corporation

This research attempts to determine whether Congress was justified in shutting down the Office of Thrift Supervision (OTS) in the wake of the 2008 financial crisis. I do so by comparing its performance with that of the other federal banking regulators: the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve. Results show that the OTS is not consistently the worst performer across a variety of measures. This finding suggests it was unfairly scapegoated and that many of the problems attributed to the OTS still remain at the other agencies, despite financial reforms in 2010.

New evidence on the impact of economic conditions and banking legislation on the bank failure rate in the US, 1970 to 2014

2016 ◽  
Vol 8 (3) ◽  
pp. 364-376
Author(s):  
Richard J. Cebula ◽  
Wendy Gillis ◽  
S. Cathy McCrary ◽  
Don Capener
Keyword(s):  
Failure Rate ◽  
Deposit Insurance ◽  
Bank Failure ◽  
Community Reinvestment Act ◽  
Content Type ◽  
The Real ◽  
Depository Institutions ◽  
Interstate Banking ◽  
Community Reinvestment ◽  
Federal Deposit Insurance

Purpose This study aims to identify factors influencing the bank failure rate in the USA over the period from 1970 to 2014 with an emphasis on economic/financial factors on the one hand and on banking legislation on the other hand. Regarding the latter, this study empirically investigates four major banking statutes: the Community Reinvestment Act of 1977; the Depository Institutions Deregulation and Monetary Control Act of 1980; the Federal Deposit Insurance Corporation Improvement Act of 1991; and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. After adopting the technique of generalized method of moments (GMM), a robustness check in the form of autoregressive conditional heteroskedasticity (ARCH) is undertaken. Overall, the estimations imply that the bank failure rate was a decreasing function of the percentage growth rate of real gross domestic product (GDP) and the real interest rate yields on both three-month US Treasury bills and 30-year fixed-rate mortgages and an increasing function of the real cost of funds. In addition, there is strong evidence that the bank failure rate was increased by provisions in the Community Reinvestment Act of 1977 and the Depository Institutions Deregulation and Monetary Control Act of 1980, whereas the bank failure rate was decreased as a result of provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Finally, there also is evidence that higher federal budget deficits elevated the bank failure rate. Design/methodology/approach After modeling the bank failure rate as a function of financial/economic variables and banking legislation, the times series from 1970 to 2014 is estimated by GMM and then by the ARCH techniques. Findings The results of the GMM and ARCH estimations imply that the bank failure rate in the US was a decreasing function of the percentage growth rate of real GDP as well as the real interest rate yields on both three-month US Treasury bills and 30-year fixed-rate mortgages and an increasing function of the real cost of funds. Furthermore, there is strong empirical support indicating that the bank failure rate was elevated by various provisions in the Community Reinvestment Act of 1977 and in the Depository Institutions Deregulation and Monetary Control Act of 1980, while the bank failure rate was reduced by certain provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. There also is evidence that higher federal budget deficits increased the bank failure rate. Originality/value This study is the most contemporary (1970-2014) analysis of potential causes of the bank failure rate in the USA. The study also may be the first to apply the GMM and GARCH models to the problem. Also, some interesting policy implications are provided in the Conclusion.

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