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Do financial crises cleanse the banking industry? Evidence from US commercial bank exits

Do financial crises cleanse the banking industry? Evidence from US commercial bank exits
Do financial crises cleanse the banking industry? Evidence from US commercial bank exits
We examine the cleansing effect of financial crises via their contribution to the exit of inefficient US commercial banks from 1984 to 2013. We find a larger increase in the exit likelihood of less efficient banks as compared to more efficient banks in the years of the Savings and Loans Crisis but not during the Global Financial Crisis. We highlight how the magnitude of the shock of the Global Financial Crisis and the subsequent, broad government interventions might explain these different results. Furthermore, we highlight that both crisis periods have a disproportionate effect on young banks regardless of their efficiency levels and that they do not generate any positive spillover effects on surviving banks in the three years post-crises in spite of some reallocation benefits in favor of new entry banks. Our findings highlight that forms of prudential regulation designed to strengthen bank resilience in good times might contribute to mitigating the effects of crisis on the longer-term productivity of the banking industry.
Financial crises, Bank efficiency, Bank exits
0378-4266
222-236
Spokeviciute, Laima
11a665b7-7266-455d-99c3-e928e9f8fb79
Keasey, Kevin
af74069e-fb04-4a41-b168-cc671383b12d
Vallascas, Francesco
1728b6df-19d6-419d-b70c-6dd6743cab64
Spokeviciute, Laima
11a665b7-7266-455d-99c3-e928e9f8fb79
Keasey, Kevin
af74069e-fb04-4a41-b168-cc671383b12d
Vallascas, Francesco
1728b6df-19d6-419d-b70c-6dd6743cab64

Spokeviciute, Laima, Keasey, Kevin and Vallascas, Francesco (2019) Do financial crises cleanse the banking industry? Evidence from US commercial bank exits. Journal of Banking & Finance, 99, 222-236. (doi:10.1016/j.jbankfin.2018.12.010).

Record type: Article

Abstract

We examine the cleansing effect of financial crises via their contribution to the exit of inefficient US commercial banks from 1984 to 2013. We find a larger increase in the exit likelihood of less efficient banks as compared to more efficient banks in the years of the Savings and Loans Crisis but not during the Global Financial Crisis. We highlight how the magnitude of the shock of the Global Financial Crisis and the subsequent, broad government interventions might explain these different results. Furthermore, we highlight that both crisis periods have a disproportionate effect on young banks regardless of their efficiency levels and that they do not generate any positive spillover effects on surviving banks in the three years post-crises in spite of some reallocation benefits in favor of new entry banks. Our findings highlight that forms of prudential regulation designed to strengthen bank resilience in good times might contribute to mitigating the effects of crisis on the longer-term productivity of the banking industry.

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More information

Accepted/In Press date: 18 December 2018
e-pub ahead of print date: 19 December 2018
Published date: February 2019
Keywords: Financial crises, Bank efficiency, Bank exits

Identifiers

Local EPrints ID: 434000
URI: http://eprints.soton.ac.uk/id/eprint/434000
ISSN: 0378-4266
PURE UUID: 9c06d789-3f3d-426a-b155-061c98bad8ac
ORCID for Laima Spokeviciute: ORCID iD orcid.org/0000-0002-6563-5790

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Date deposited: 10 Sep 2019 16:30
Last modified: 27 Apr 2022 07:53

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Contributors

Author: Laima Spokeviciute ORCID iD
Author: Kevin Keasey
Author: Francesco Vallascas

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