Why Do Banks Fail? Evidence from the 1920s

Alston, Lee J.; Grove, Wayne A.; Wheelock, David C.

doi:10.1006/exeh.1994.1017

Cited by 144 publications

(103 citation statements)

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“…Clearly, in a highly stable and "forgiving" economic context, when even poorly managed banks are unlikely to fail, board composition may have less dramatic consequences than in the midst of a financial crisis. At the same time, most years within our time window did not involve a financial crisis, and overall failure rates in our time period were not substantially higher or lower than failure rates in most decades between 1920 and 1990 (see Alston, Grove, & Wheelock, 1994;Seballos & Thomson, 1990). Moreover, our models accounted for year-to-year variation in economic conditions by controlling for the rate of GDP growth and the number of bank failures each year.…”

Section: Limitations Boundary Conditions and Future Researchmentioning

confidence: 62%

When Experts Become Liabilities: Domain Experts on Boards and Organizational Failure

Almandoz

Tilcsik

2016

AMJ

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How does the presence of domain experts on a corporate board-directors whose primary professional experience is within the focal firm's industry-affect organizational outcomes? We argue that under conditions of significant decision uncertainty, a higher proportion of domain experts on a board may detract from effective decision making and thus increase the probability of organizational failure. Building on exploratory interviews with board members and CEOs, we derive hypotheses from this argument in the context of local banks in the United States. We predict that the greater the level of decision uncertainty-due to rapid asset growth or operation in less predictable markets-the stronger the relationship between the proportion of banking expert directors and the probability of bank failure. Longitudinal analyses of 1,307 banks between 1996 and 2012 support this prediction, even after accounting for both the overall level of professional diversity among directors and banks' different propensities to have an expert-heavy board. We discuss implications for the key dimensions of board composition, the conditions under which the professional background of directors is more or less consequential, and the mechanisms whereby board composition affects organizational outcomes.

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Section: Limitations Boundary Conditions and Future Researchmentioning

confidence: 62%

When Experts Become Liabilities: Domain Experts on Boards and Organizational Failure

Almandoz

Tilcsik

2016

AMJ

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“…Historians argue that the boom in land prices up to 1920 had its roots in optimism that "…European producers would need a very long time to restore their pre-war agricultural capacity…" (Johnson (1973, p178) So the "depression" in agricultural incomes was only relative to the heady levels reached in the period 1917-1920(Johnson (1973, Alston, Grove, and Wheelock (1994)). …”

Section: Historical Descriptionmentioning

confidence: 99%

“…Mortgage debt per acre increased 135% from 1910 to 1920, approximately the same rate of increase as the per acre value of the ten leading crops (Alston, Grove, and Wheelock (1994) citing Federal Reserve documents). Credit was widely available, as local banks, as well as life insurance companies, joint stock land banks and Federal land banks competed in some areas to provide credit (Alston (1983a, b).…”

Section: Historical Descriptionmentioning

confidence: 99%

The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s.

Rajan¹,

Ramcharan²

2012

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“…He also finds that despite strict regulation lessened risk-taking, a high proportion of insured banks resulted in higher bank failure rates in Kansas during the 1920's. He noted deposit insurance has been one of the important causes of bank failures during the 1920's (Alston et al, 1994). Chernykh and Cole (2011) analyze bank-level data for 800 institutions in the Russian Federation over the period [2004][2005][2006] and used several types of accounting information.…”

Section: Previous Empirical Evidencementioning

confidence: 99%

The Effect of Deposit Insurance on Risk Taking in Asian Banks

Enkhbold

Otgonshar

2013

AJFA

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This paper uses a panel database of 401 banks in 31 Asian countries over the period from 2000 to 2010 to examine the effects of deposit insurance on banks' risk-taking incentives. We find that risk-taking incentives vary with bank size and risks. In addition, differentiated premiums may not accurately reflect the level of risk that a bank poses. In the presence of a deposit insurance scheme, the pattern of the non-linear relationship between bank size and risk-taking significantly changes. Our results suggest that market discipline exercised by banks is stronger in the presence of mandatory deposit insurance scheme. Government-funded deposit insurance funds allow Asian banks to take a higher risk. A risk-based deposit insurance scheme functions more effectively in the countries with good regulatory framework and institutional quality.

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Why Do Banks Fail? Evidence from the 1920s

Cited by 144 publications

References 0 publications

When Experts Become Liabilities: Domain Experts on Boards and Organizational Failure

When Experts Become Liabilities: Domain Experts on Boards and Organizational Failure

The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s.

The Effect of Deposit Insurance on Risk Taking in Asian Banks

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