Bank fragility and the financial crisis: Evidence from the U.S. dual banking system

Abstract

Purpose – This chapter compares the stability of the U.S. Dual Banking system's two bank groups, national and state banks, in light of the current financial crisis. The goal of the chapter is to answer three distinct questions: first, is there a difference in the (balance sheet) fragility between the two groups and, second, to what extent has the balance sheet fragility of both groups changed after the escalation of the financial crisis beginning in August 2007? Building on that, the third question asks to whether or not the respective regulatory agencies of both bank groups are responsible for these changes in balance sheet fragility in light of the financial crisis.

Methodology – To answer these questions the chapter uses U.S. Call Report data containing full quarterly balance sheets and P&Ls of all U.S. commercial banks over the period 2005–2008. Anecdotal evidence as well as univariate and multivariate difference-in-difference methodology focusing on the immediate pre-crisis period Q1/2005–Q3/2007 and the crisis period Q3/2007–Q4/2008 are applied.

Results – Highly significant and robust results show that, ceteris paribus, national banks reduced their potential balance sheet fragility after the escalation of the crisis in August 2007 by reducing lending and liquidity creation stronger than state banks. Anecdotal evidence supports the empirical findings. Although both FDIC and OCC did not anticipate the adverse effects of the crisis, the OCC publicly showed an earlier reaction to liquidity-related problems than the FDIC.

Originality – The chapter is the first of its kind to analyze bank fragility around the escalation of the financial crisis and the role of the regulatory agencies. The chapter holds especially interesting policy implications in the light of the current discussion about the future regulation of the banking markets.

Citation

Rauch, C. (2010), "Bank fragility and the financial crisis: Evidence from the U.S. dual banking system", Kim, S.-J. and Mckenzie, M.D. (Ed.) International Banking in the New Era: Post-Crisis Challenges and Opportunities (International Finance Review, Vol. 11), Emerald Group Publishing Limited, Leeds, pp. 33-86. https://doi.org/10.1108/S1569-3767(2010)0000011006