Understanding Bank Bankruptcies

The housing downturn started in 2006 when housing process dropped significantly after reaching peak levels in the early 2000s. This resulted in an abrupt increase in loan defaults and mortgage foreclosures that led to widespread crises in the banking industry. The late-2000s financial crisis led to a surge of bank failures in the United States at an overwhelming rate not observed in many years. The cycle of seizures started in 2007, and by the end of 2010, a total of 325 banks failed. In contrast, only 24 banks had failed in the seven-year period prior to 2007. A UGA agricultural and applied economics project analyzed the significance of predictors of bank failures using financial performance and macroeconomic variables. The analysis involved both failed and surviving commercial banks that operated shortly before and during the late 2000s Great Recession. Early warning models were developed for several 6-month periods going backwards to around 4 years before actual bank failures occurred. Among the significant predictors identified were more costly funding arrangements, higher interest rate risks, increasing real estate, consumer and industrial credit concentration, declining profits, and deteriorating liquidity conditions. The most compelling result was the insignificance of agricultural lending variables that refute the contention that agriculture is a riskier borrowing sector.