Management Accounting Section Midyear Meeting

Predicting Bank Failure Using Regulatory Data

• In Event: Break/Research Exhibition 3: Interfirm Issues and Governance

Abstract

A liquidity shortage in the United States triggered the bankruptcy of several large commercial banks, and bank failures continue to occur, with 50 banks failing between 2013 and 2015. Therefore, it is critical banking regulators understand the correlates of financial performance measures and the potential for banks to fail. In this study, binary logistic regression was employed to assess the theoretical proposition that banks with higher nonperforming loans, lower Tier 1 leverage capital, and higher noncore funding dependence are more likely to fail. Archival data ranging from 2012–2015 were collected from 250 commercial banks listed on the Federal Deposit Insurance Corporation’s website. The results of the logistic regression analyses indicated the model as a whole was able to predict bank failure, X2(3, N = 250) = 218.86, p < .001. Nonperforming loans, Tier 1 leverage capital, and noncore funding were all statistically significant, with Tier 1 leverage capital (β = -1.485), p < .001) accounting for a higher contribution to the model than nonperforming loans (β = .354, p < .001) and noncore funding dependence (β = -.057, p = .015). The basis for this study was the need for banking regulators to understand whether certain banking performance measures could predict bank failure. Many stakeholders blame regulators and bank managers for bank failures (Massman, 2015). Banking regulators face criticism for not having adaptable systems that forewarn of bank distress, and bank managers face criticism for not escalating issues quickly enough to allow regulators to implement corrective action (Massman, 2015). Existing bank monitoring tools and systems do not provide sufficient early warning during a financial crisis (Pakravan, 2014). My objective with this study was to help bank regulators understand how performance measures, such as nonperforming loans, Tier 1 leverage capital, and noncore funding dependence, may help to indicate the potential for bank failure.

Author

• Helen R Pruitt, University of Maryland-University College