The Banking and Finance Review

US community bank failure: An empirical investigation

Kyle James Putnam, M. Kabir Hassan

Abstract


The US community banking industry has been substantially reduced over the last 40 years. Yet, community banks continue to play a pivotal role in the economy. We analyze 452 community banks, which failed between 2000 and 2013, relative to a sample of surviving community banks to determine which accounting, ratio, and macroeconomic variables are most relevant for predicting community bank failure. We find that most pertient indicators of failure risk are CAMELS financial ratios related to equity, loss provisions, and compensation. Moreover, we document that the use of a macroeconomic conditions variable, the TED spread, provides a substantial improvement in modeling predictive failure risk.

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