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Déjà Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around*

Statistical models were used to control for—i.e., remove—the impact of socioeconomic factors that might account for the correlation between race/ethnicity and credit scores. The inclusion of such controls slightly weakened, but by no means eliminated (or accounted for) the association between minority status and credit scores. Among all such control variables, race/ethnicity proved to be the most robust single predictor of credit scores; in most instances it had a significantly greater impact than education, marital status, income and housing values. It was also the only variable for which a consistent correlation was found across all companies | Déjà Vu All Over Again The Causes of U.S. Commercial Bank Failures This Time Around Rebel A. Cole Kellstadt College of Commerce DePaul University Chicago IL USA Rcole@depaul.edu Lawrence J. White Stern School of Business New York University New York NY UsA Lwhite@ stern.nyu.edu Abstract In this study we analyze why commercial banks failed during the recent financial crisis. We find that traditional proxies for the CAMELS components as well as measures of commercial real estate investments do an excellent job in explaining the failures of banks that were closed during 2009 just as they did in the previous banking crisis of 1985 - 1992. Surprisingly we do not find that residential mortgage-backed securities played a significant role in determining which banks failed and which banks survived. Key words bank bank failure CAMELS FDIC financial crisis mortgage-backed security commercial real estate JEL codes G17 G21 G28 DRAFT 2010-07-29 An earlier version of this paper was presented at the Federal Reserve Board we thank the attendees at that seminar as well as Viral Acharya and W. Scott Frame for helpful comments on that earlier draft. 1 Déjà Vu All Over Again The Causes of U.S. Commercial Banks Failures This Time Around It s only when the tide goes out that you learn who s been swimming naked. 1 1. Introduction Why have U.S. commercial banks failed during the ongoing financial crisis that began in early 2008 with the failure of Bear Stearns The seemingly obvious answer is that investments in the toxic residential mortgage-based securities RMBS primarily those that were fashioned from subprime mortgages brought them down but that turns out to be the wrong answer at least for commercial banks. Certainly toxic securities were problematic for investment banks and the largest commercial banks and their holding companies but none of these large commercial banks have technically failed.2 Yet in 2009 the FDIC reported that it closed 140 smaller depository institutions and .