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Predicting Bank Failures in the 1980s

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Opinions stated in Economic Review are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. This paper uses a single-equation logic model to discriminate between samples of failed and nonfailed banks over the 1984-1989 period. Previous failure prediction studies had to pool bank failures across years to obtain an adequate sample. The historically high number of failed banks over the past decade, however, allows each year in the sample period to be examined separately. The author incorporates measures of economic conditions in the failure prediction equation, along with the traditional balance-sheet risk measures, and finds that the majority of these variables are significantly related to bank failure as much as four years before an institution actually folds.

Suggested citation: Thomson, James B. “Predicting Bank Failures in the 1980s,” Federal Reserve Bank of Cleveland, Economic Review, vol. 27, no. 1, pp. 9-20, 03.01.1991.

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