Bank Failures and Bank Fundamentals: A Comparative Analysis of Latin America and East Asia during the Nineties using Bank-Level Data

The author develops the first comparative empirical study of bank failures during the nineties between East Asia and Latin America using bank-level data, in order to address the following two questions: (i) To what extent did individual bank conditions explain bank failures? (ii) Did mainly the weakest banks, in terms of their fundamentals, fail in the crisis countries? The main results for East Asia and Latin America show that bank-level fundamentals not only significantly affect the likelihood of bank failure, but also account for a significant proportion of the likelihood of failure for failed banks. Systemic shocks (macroeconomic and liquidity shocks) that triggered the banking crises mainly destabilized the weakest banks ex ante, particularly in East Asia. This finding raises questions about regional asymmetries in the degree of banking sector resilience to systemic shocks.

Published In:

Journal of Banking and Finance (0378-4266)
February 2008. Vol. 32, Iss. 2, pp. 299-310