PREDICTING BANK FAILURES: THE NECCESITY OF BANK CAPITAL REQUIREMENTS

Nancy Seelye
First Financial Bank

Paul Ziegler
University of Mary Hardin-Baylor

ABSTRACT

This study investigates the prediction of bank failure using observable variables from
readily available published sources. Bank failure in a local economy can reduce liquidity,
affecting available funds for local business and individuals. This study compares the ratios for the
forty-two banks that failed in the years 2013-2016 versus a random sample of “troubled” banks.
Results indicate that capital ratios along with loan risk and loan loss reserves were the most
successful in predicting bank failure. This result supports the higher level of capital requirements
and the capital ratio reporting requirements.

Keywords: Capital ratios, loan risk, bank failure, bank capital, bank failure, receivership