Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions

Abstract

This paper examines the determinants of individual bank failures and acquisitions in the UnitedStates during 1984-1993. We use bank-specific information suggested by examiner CAMELrating categories to estimate competing-risks hazard models with time-varying covariates. We focus especially on the role of management quality, as reflected in alternative measures of xefficiency and find the inefficiency increases the risk of failure, while reducing the probability of a bank's being acquired. Finally, we show that the closer to insolvency a bank is, as reflected by a low equity-to-assets ratio, the more likely its acquisition. KEYWORDS:Bank failures, bank acquisitions, managerical efficiency, hazard model estimation We have benefited from comments on an earlier version by Alton Gilbert, Shawna Grosskopf, Subal Kumbhakar, Michel Mouchart, Larry Wall and an anonymous referee. Any remaining errors are our responsibility.

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