Abstract

Bank solvency questions and bank failures in the U.S. have become issues of renewed concern in recent years. Given the significance of bank solvency and bank failures for the health and stability of the U.S. economy, it is imperative to have insights into factors that systematically influence bank failures, including major federal government banking statutes that have been implemented. Accordingly, this empirical study investigates factors influencing the bank failure rate in the U.S. over the period 1970 through 2008, with emphasis on three major banking statutes: the Community Reinvestment Act of 1977 (revised and enhanced in 1995), CRA; the Federal Deposit Insurance Corporation Improvement Act of 1991, FDICIA; and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, RNIBA. After allowing for a variety of economic and financial variables over the study period, the evidence strongly implies that, FDICIA acted to reduce bank failures whereas (presumably by increasing competition and/or increasing costs through branch bank expansion) RNIBA induced a net increase in bank failures in the U.S. Finally, the evidence implies that, the CRA also led to increased bank failures in the U.S., arguably by exposing banks to greater credit risk.

Key words: Bank failures, banking regulation, banking deregulation.