An Analysis of Bank Failures: 1984 To 1989

This paper models the regulatory decision to close a bank as a call option. A two-equation model of bank failure, which treats bank closings as regulatorily timed events, is constructed from the call option closure model and estimated for bank failures occurring from 1984 through 1989. Thetwo-equation model is also compared with two single-equation models in terms of both in-sample and out-of-sample predictive accuracy.