Factors Affect Bank Failure

Methods of Economic Analysis
FACTORS affect
BANK FAILURES
in USA from 2001 to 2021
___________
Instructor: Prof. Park Kee Hwan

Project implementer:
Pham Quynh Anh – 320I0131
Nguyen Thanh An – B20I0080
Introduction ......................................................................................................... 1
1. Background and context ............................................................................ 1
2. Research problem ....................................................................................... 1
3. Research questions/hypotheses.................................................................. 1
4. Importance and significance of the study ................................................. 1
5. Outline of the paper ................................................................................... 2
Literature review ................................................................................................. 3
1. Overview of the field of study .................................................................... 3
2. Synthesis of the relevant literature and Critique of previous research ... 4
3. Gaps in the literature ................................................................................. 6
4. Theoretical framework ............................................................................... 6
Methodology ........................................................................................................ 7
1. Research design .......................................................................................... 7
2. Sampling and sample size .......................................................................... 7
3. Data collection methods and procedures .................................................. 7
4. Data analysis methods ............................................................................... 7
5. Limitations and delimitations .................................................................... 8
Results .................................................................................................................. 9
1. Description of the sample .......................................................................... 9
2. Analysis of data .......................................................................................... 9
3. Presentation of findings ........................................................................... 10
Discussion ........................................................................................................... 13
1. Interpretation of results ........................................................................... 13
2. Comparison with previous research ........................................................ 20
3. Implications for theory and practice ....................................................... 20
Conclusion .......................................................................................................... 28
1. Summary of key findings: ........................................................................ 28
2. Implications for theory and practice ....................................................... 30
3. Contribution to the field ........................................................................... 31
4. Limitations and future research directions: ........................................... 32
References .......................................................................................................... 34
CONTENTS
Introduction
1. Background and context

Any economy's finance sector plays a significant role, and its stability is
essential for achieving long-term economic progress. By facilitating transactions for
both individuals and businesses and by extending credit, the banking sector in
particular contributes significantly to the financial system. However, the global
financial environment, with a special focus on the United States, has experienced
substantial fluctuations between 2001 and 2021. The crises have made it more
crucial than ever to comprehend the elements that contribute to bank failures and to
create the right policies to reduce systemic risk.
This paper examines the causes of bank failures in the United States between
2001 and 2021, a time of significant financial instability and regulatory reforms.
The report will employ regression analysis to examine the connections between
different variables and bank failures, offering insightful information on the root
causes of these failures.
2. Research problem
Explore the factors that caused bank failures in the US from 2001 to 2021 -
Find out why they affect bank failures based on regression analysis.
3. Research questions/hypotheses
Identify the causes - Look at the economic, financial, and regulatory
problems that emerged during this time as bank failures.
Quantify the impacts - Using regression analysis, ascertain the extent to
which these factors have an impact on the chance of bank failure.
Assess the efficiency of regulatory and policy reforms made between 2001
and 2021 in response to financial crises, as well as their effects on the stability of
the US banking sector.
4. Importance and significance of the study

 Impact on the economy: Banks are significant financial intermediaries and
are essential to the economy. When banks fail, it can have a big impact on
the economy, perhaps causing a recession, disrupting the credit markets, and
limiting lending to people and companies. In order to prevent or lessen the
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economic impact of bank failures, policymakers and regulatory bodies can

benefit from an understanding of the variables that contribute to bank
failures.
 Risk management: Knowing what causes bank failures can aid institutions in
enhancing their risk management procedures. Banks can take action to
reduce the risks involved and enhance their overall financial stability by
identifying the elements that make a bank more likely to fail.
 Regulatory supervision: The elements that contribute to bank failures can be
identified through research in order to improve regulatory control. In order
to address the underlying causes of bank failures, regulators can use this
information to create more effective legislation and supervisory processes.
 Investor trust: An investor's decision to invest in a bank might be informed
by research as well. Investors can more accurately estimate the risks
associated with investing in individual banks by being aware of the variables
that lead to bank collapses..
5. Outline of the paper

In order to provide a thorough understanding of the factors driving bank
failure, the report will: (1) review existing literature, (2) collect data on selected
factors, (3) perform regression analysis, (4) analyze the reasons and how these
factors affect the failure of the bank. Those factors include:
● Macroeconomic factors: Analyze the impact of macroeconomic variables on
bank failure, including GDP growth, imports, exports, unemployment,
inflation, and interest rates.
● Bank specific features: Examine the effect of factors unique to banks, such
as capital sufficiency, asset quality, profitability, and liquidity, on the
probability of bank collapse.
● External shocks: Examine the effect of outside factors, such as the 2008
financial crisis, on bank failures and the stability of the financial system as a
whole.
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Literature review
1. Overview of the field of study

In this report, the causes of bank failure are examined. Direct factors and
indirect factors are the two basic categories into which these elements are divided.
Changes in the unemployment rate, real interest rates, the Federal Reserve interest
rate (also known as the FED's effective interest rate), basic interest rates, and bank
lending are examples of direct factors. Changes in macroeconomic variables
including national production, inflation, exports, and imports are examples of
indirect influences. From 2001 to 2021, statistics on these factors will be gathered
yearly.
One of the oldest services is banking, which has been around for a very long
time. The earliest known instance of banking was in Babylon in the 18th century
BC. Since then, from the 18th century BC to the present, banking has been linked
to numerous times of prosperity or recession in many different eras or nations.
Therefore, the topic of bank bankruptcy and the causes of bank bankruptcy has been
around for thousands of years. There are various justifications for the reasons behind
the bank's demise for each era or time frame. Additionally, there are varying
numbers of theories concerning macroeconomics, cash flow, and human
psychology for each historical era. Therefore, in order to have a complete
understanding of each age, we must not only apply current economic theories but
also social contextual analysis relevant to that time. From there, we can assess and
understand events appropriately and objectively. How did these things cause the
bank to go bankrupt? From there, we can discover how to stop bankruptcies in the
future.
We will present some of the topics mentioned in this study report so that it
can be read in the most coherent manner possible. We'll start by talking about the
idea of bank liquidity loss or bank runs. The cash flow of the bank is affected by
this phenomenon. This means that when bank depositors need to withdraw money,
the bank is unable to do so since it is short on cash. This prevents those clients from
either withdrawing the money they require or all of the money still available in the
bank, disrupting the bank's cash flow. Second, we'll study the idea of bank
bankruptcy, often known as bank insolvency. When a bank is unable to fulfill its
financial commitments or pay its debts, the condition is referred to as bankruptcy or
insolvency of a bank.
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2. Synthesis of the relevant literature and Critique of previous research

In “Asset quality and bank performance: A study of commercial banks in
Nigeria” by Dr Abata, Matthew Adeolu: This study examined and evaluated the
asset quality and performance of banks in Nigeria using secondary data obtained
from annual reports and accounts of the six largest banks listed on the Nigerian
Stock Exchange. The study used data from 1999 to 2013 with regression analysis
creating a measure of the bank's operational efficiency and asset quality.
Recommendations were made for policies to diversify revenue, minimize credit
risk, and encourage banks to reduce cash holdings. Additionally, this study delved
deeper into bank liquidity issues to increase academic value for this report.
However, this report did not analyze specific factors that affect dependent variables
to determine how they affect the main variables. Therefore, we have only imagined
the factors influencing the dependent variables on the main variables but have not
had a comprehensive perspective. In my personal opinion, for the economy, we must
analyze external factors in parallel with the main factors we are interested in. When
we can present external environmental factors, this report can help readers better
understand the relationship and importance of variables in explaining the
relationship between variables.(Abata, 2014)
In “The Effect of Inflation on Performance: An Empirical investigation on
the Banking Sector in Jordan” by Ammar Yasser ALMANSOUR, Haitham
Mohammad ALZOUBI, Bashar Yasser ALMANSOUR, and Yaser Mansour
ALMANSOUR: This article aims to investigate the impact of inflation on the
operational efficiency of the banking sector in Jordan, with data from banks listed
on the Amman Stock Exchange during the period 2009-2019. The main indices used
include return on assets, return on investment, and net profit margin. Through these
indices, the operational efficiency of banks in Jordan was described, showing a
strong and inverse relationship between the inflation rate and the operational
efficiency of banks. Therefore, the results showed that the operation of banks was
significantly affected by inflation. One of the limitations of this article is the method
of data collection. With data collection on an annual basis, the figures may not be
detailed enough to describe the actual trends that occurred within the year. Small
changes in inflation or macroeconomic indicators can also have a significant impact
on the stock market simultaneously. Therefore, with the method of collecting data
annually, the evaluation is not enough.(ALMANSOUR et al., 2021)
In “Conceptual Exposition of the Effect of Inflation on Bank Performance”
by Umar Mohammed, Mohammad Adamu, and Danjuma Maijama'a: This research
demonstrates the relationship between inflation and the efficient operation of banks.
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The study shows the degree to which banks absorb short- and long-term economic
shocks. In addition, the research shows that inflation affects the purchasing power
and exchange rate regime of banks, the opportunity cost of holding currency in the
future, undermines lending policies, breaks business plans and the performance of
holding equity of banks. Therefore, it provides solutions to overcome as well as
anticipate solutions to inflationary changes. However, the shortcoming of this article
is the lack of specific statistical data. The majority of the article's content is built on
theoretical and analytical foundations. The lack of specific statistical data has
reduced the objectivity and persuasiveness of this report. (Umar et al., 2014)
In “Predicting US Bank Failure: A Discriminant Analysis” by Raymond A.
K. Cox and Grace W-Y Wang: This report tracks the failure of US banks from 2007
to 2010 for poor investment decisions and high risk exposure to systemic risk
channels. The research shows that the ratio of illiquid loans on their books and
exposure to interbank funding markets are the main predictors of bank failure. (Cox
& Wang, 2014)
In “Credit Risk Determinants of Bank Failure: Evidence from US Bank
Failure” by Abdus Samad: This research studies important determinants, among the
credit risk variables, of the failure of US banks using the Probit model. (Samad,
2012)
In “RISK MANAGEMENT IN BANKING SECTOR-AN EMPIRICAL
STUDY” by TIRUPATI KANCHU and M. MANOJ KUMAR: This study discusses
"Risk management is the application of proactive strategies to plan, lead, organize
and control various risks related to the daily and long-term activities of an
organization." With data collected from economic journals, newspapers, and books.
The conclusion of this report reflects the view that banks should accept a small risk
ratio to ensure asset safety for the bank. (Kanchu & Kumar, 2013)
In “Bank failure risk: Different now?” by Sherrill Shaffer: This research
shows the similarities and differences between crises. The research explains events
based on logic, analyzes banks' asset ratios, and the probability of bank failure.
(Shaffer, 2012)
In “The Influence of Capital Adequacy on Asset Quality Position of Banks
in Tanzania” by Dickson Pastory & Marobhe Mutaju: This research report studies
the relationship between the safety level of capital and the quality of assets. The
study uses secondary panel data and finds a significant and positive relationship
between capital adequacy and asset quality. (Pastory & Mutaju, 2013)
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3. Gaps in the literature

All the research papers show that macroeconomic factors have an impact on
bank bankruptcies. However, due to differences in timeframes and macroeconomic
factors being considered, each report provides an assessment based on the data
presented in the respective studies.
4. Theoretical framework
Theoretical foundation (paradigm) of the research.: Multivariate regression
equation (quantitative method).
Research question: (1) What are the factors that have influenced bank
failures in the United States from 2001 to 2021?; (2) What is the relationship
between the variables?; (3) Why is there that relationship?
Central factor: The number of bank failures in the US from 2001 to 2021.
Factors influencing the central factor: (1) GDP real; (2) Unemployment rate;
(3) Inflation; (4) Interest rate; (5) Real interest rate; (6) FED fund rate change; (7)
Bank credit; (8) Export; (9) Import.
Hypothesized relationship: Positive correlation, negative correlation.
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Methodology
1. Research design
This study aims to investigate the factors that caused bank failures in the
United States from 2001 to 2021 and how these factors influenced bank failures
based on quantitative regression analysis.
The independent variables include GDP rate, unemployment rate, inflation,
FED fund rate effective, real interest rate, FED fund rate change, bank credit, export,
and import. These variables will be used as binary indicators to determine whether
banks failed or not.
The study will use a multiple regression model to estimate the impact of the
independent variables on the likelihood of bank bankruptcy.
2. Sampling and sample size

● Sampling: Historical data.
● Sample size: Macro indicators, number of bank failures, and interest rate
factors from 2001 to 2021 year over year.
3. Data collection methods and procedures

The data for this study will be collected from various sources (Economic
Research, FDIC, etc.), including economic articles, economic data sources, and
industry reports. The data will be cleaned, merged, and prepared for analysis. The
study will focus on collecting data on specific characteristics of banks,
macroeconomic variables, and regulatory variables. Finally, the data will be
synthesized using EViews software.
4. Data analysis methods

The data for this study will be analyzed using quantitative regression
analysis, specifically multiple regression analysis to estimate the impact of the
independent variables on the likelihood of bank failure. The regression model will
include both main effects and interaction terms to capture any effects or interactions.
The model will be estimated using maximum likelihood estimation, and goodness-
of-fit measures will be used to assess the model's fit.
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5. Limitations and delimitations

● Limitations: The limitations of the study will include the possibility of noise
factors, limitations of the data sources, and the potential for model
misspecification.
● Demilitations: The delimitations of this study include the time frame from
2001 to 2021 and the focus on banks in the United States. The study will not
investigate other types of financial institutions, such as credit unions or
investment firms. Additionally, the study will not investigate specific causes
leading to the failure of each bank but rather factors contributing to the failure
of banks at the systemic level.
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Results
1. Description of the sample

● Population: All banks in the United States from 2001 to 2021. The failed
banks had an average asset size of $1.2 billion and were located in various
regions across the United States. The non-failed banks had an average asset
size of $1.5 billion and were also located in various regions across the United
States.
● The independent variables used in the study include:
- GDP rate: This is the percentage change in the value of all goods and services
produced within a country during a specific period of time, compared to the
previous period.
- Unemployment rate: The unemployment rate measures the percentage of the
labor force that is unemployed.
- Inflation rate: The inflation rate measures the percentage change in the price
of goods and services over time.
- Effective fed fund rate: Calculated as the volume-weighted average of
federal funds transactions reported in the FR 2420 Report of Selected Money
Market Rates.
- Real interest rate: The real interest rate is the nominal interest rate adjusted
for inflation.
- Fed fund rate change: The change in the federal funds rate measures the
change in the interest rate at which banks lend to each other overnight.
- Bank credit: Bank credit measures the total amount of credit extended by
banks.
- Export and import: Exports and imports measure the total value of goods and
services exported and imported by a country.
2. Analysis of data
To explain the relationship between independent variables and the dependent
variable, we decided to perform a regression analysis (quantitative method) to
determine if there is a statistically significant relationship between the two variables.
The model takes the form of:
Number of bank failures = The intercept (α) + β1.Independent variables1 +
β2.Independent variables2 +...+ β9.Independent variables9 + The error term
(ε)
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The strength and direction of the relationship between independent variables

and the number of failed banks will be shown in the coefficient (β) of the regression
model. If β is positive, the relationship between the number of failed banks and the
independent variable is a positive relationship. If β is negative, the relationship
between the number of failed banks and the independent variable is a negative
relationship.
The intercept in the above equation can be understood as the number of banks
that will fail when the variables being considered do not change. We can imagine
this as a natural default rate for banks. When not influenced by external variables, a
bank's ability to default on its own is a certain number.
The error term is the coefficient that exists in the equation due to factors such
as the accuracy and detail of the data. The more accurate and detailed the data, the
smaller this coefficient will gradually decrease. However, in reality, it is difficult
for the error coefficient to be zero because we cannot have all the most accurate and
detailed data.
Variable Coefficient Standard Error t – Statistic Probability
C -223.0560 93.27070 -2.391490 0.0358
UNR 29.61588 6.342901 4.669137 0.0007
GDPR 9.333904 6.928091 1.347255 0.2050
INF 13.37405 14.69216 0.910285 0.3822
FFRE -11.58130 5.988878 -1.933801 0.0682
RIR 25.06451 20.87616 1.200629 0.2551
FFRC 5.274936 5.192528 0.823286 0.4278
BC 10.25540 7.728919 1.326886 0.2114
EXPORT 213.7768 150.4882 1.420555 0.1832
IMPORT -200.1202 134.3505 -1.489538 0.1644
3. Presentation of findings
● Unemployment rate – UNR
UNR 29.61588 6.342901 4.669137 0.0007
With the data above, we can see a relatively strong positive relationship
between the unemployment rate and the number of failed banks with a coefficient
of 29.61588. This means that for every one percentage point increase in the
unemployment rate, there will be approximately 30 more banks that fail, all other
things being equal. The t-Statistic is 4.669 and the probability is less than 5%,
indicating a significant and statistically meaningful effect due to a specific cause.
● GDP rate – GDPR
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GDPR 9.333904 6.928091 1.347255 0.2050
With the data above, the coefficient of GDP is 9.333904, indicating that the
expected number of bankruptcies will increase as GDP increases. We can conclude
that real GDP has a positive relationship with the number of bank failures if other
factors are not considered. This suggests that if GDP increases, the likelihood of
bank failures will also increase. The t-statistic value is 1.3547255 and the
probability is 0.2050, indicating that it is not statistically significant, and this occurs
by chance. This suggests that this independent variable does not have a direct impact
on bank failure but will have some indirect relationships depending on the specific
context and conditions of the economy.
● Inflation – INF
INF 13.37405 14.69216 0.910285 0.3822
Based on the table above, we can see a positive correlation between inflation
and bank failure, as shown by the coefficient of 13.37405. This indicates that for
each unit increase in inflation, the rate of bank failure will increase by 13.37405
units, without considering other factors. The t-statistic is 0.910285 and the
probability is 0.3822, indicating that it is not statistically significant, and this is due
to chance. This suggests that this independent variable does not have a direct impact
on bank failure, but there may be some indirect relationships depending on the
specific context and conditions of the economy..
● Fed fund rate effective – FFRE
FFRE -11.58130 5.988878 -1.933801 0.0682
Based on the table above, we can see an inverse relationship between
effective fed funds rate and the number of bank failures through a coefficient of -
11.58130. This statistic shows that as the effective fed funds rate increases, the
likelihood of bank failures decreases, if other factors are held constant. The t-
statistic is -1.933801 and the probability is 0.0682, indicating that it is not
statistically significant and this occurs by chance. This suggests that this
independent variable does not have a direct impact on bank failures but will have
some indirect relationship depending on the context and specific conditions of the
economy..
● Real interest rate – RIR
RIR 25.06451 20.87616 1.200629 0.2551
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Based on the above figures, we can see a positive correlation between exports
and the number of bank failures, as indicated by the coefficient of 25.06451. This
means that as the real interest rate increases, the likelihood of bank failures also
increases, without considering other factors. The t-statistic of 1.200629 and
probability of 0.2551 show that it is not statistically significant, and this is due to
random chance. This indicates that this independent variable does not have a direct
impact on bank failures, but there may be some indirect relationships depending on
the specific context and conditions of the economy..
● Fed fund rate change – FFRC
FFRC 5.274936 5.192528 0.823286 0.4278
Based on the above data, the coefficient of fed fund rate change is 5.274936,
indicating that the expected number of bank failures will increase when fed fund
rate change increases, without considering other factors. We can conclude that fed
fund rate change has a positive correlation with the number of bank failures. The t-
statistic is 0.823286 and the probability is 0.4278, indicating that it is not statistically
significant, and this is due to chance. This shows that this independent variable does
not have a direct impact on bank failures but will have some indirect relationships
depending on the specific context and conditions of the economy.
● Bank credit – BC
BC 10.25540 7.728919 1.326886 0.2114
Based on the data above, we can clearly see a positive correlation between
the number of bank failures and bank credit, with a coefficient of 10.25540. This
indicates that for every one unit increase in bank credit, the probability of a bank
failure increases by 10.25540 units, if other factors are not considered. The t-statistic
is 1.326886 and the probability is 0.2114, indicating that it is not statistically
significant and that this is due to chance. This shows that this independent variable
does not have a direct impact on bank failures, but rather there are some indirect
relationships that depend on the specific context and conditions of the economy.
● Export
EXPORT 213.7768 150.4882 1.420555 0.1832
Based on the data above, we can observe a positive correlation between
exports and the number of bank failures, as evidenced by the coefficient of
213.7768. This means that when exports increase, the likelihood of bank failures
also increases, if other factors are not considered. The t-statistic is 1.420555 and the
probability is 0.1832, indicating that it is not statistically significant and this occurs
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by chance. Additionally, this independent variable does not have a direct impact on
bank failures, but rather there are some indirect relationships that depend on the
specific context and conditions of the economy.
● Import
IMPORT -200.1202 134.3505 -1.489538 0.1644
Based on the table above, we can see an inverse relationship between imports
and the number of bankrupt banks, with a coefficient of -200.1202. This data shows
that for every unit increase in imports, the likelihood of bank failure will decrease
if other conditions are not considered. The t-Statistic is -1.489538 and the
probability is 0.1644, indicating that it is not statistically significant and this may
occur randomly. This also suggests that this independent variable does not have a
direct impact on bank failure but has some indirect effects.
Discussion
1. Interpretation of results

For a variety of factors, including a higher risk of loan defaults, the depletion
of countercyclical capital buffers, decreased demand and revenue, macroeconomic
repercussions on the economy, and contagion effects, high unemployment can cause
many banks to fail.
When there is a high unemployment rate, people lose their jobs and their
ability to pay their debts and other obligations. The effect will be an increase in
default rates, particularly for mortgages or consumer loans. The bank experienced
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losses due to a high bad debt ratio, debt forgiveness had an impact on the bank's
capital, and the bank was unable to cover operational costs. This situation could
deteriorate and result in bank failure and withdrawals.
When the economy is performing well, banks have little trouble increasing
their capital reserves. However, as loan losses rise and income fall as a result of an
economic slump brought on by increased unemployment, the bank's capital reserve
is depleted. The likelihood of a bank failure will increase if capital levels are too
low for the risk. The bank may be better able to navigate challenges if its
countercyclical capital buffers are sufficiently large.
Because of the high unemployment rate, people are struggling to make ends
meet, which has a knock-on effect on consumer demand and bank earnings from
service fees. As a result, the bank loses some revenue, its earnings drop, and its
chances of failing also rise.
Increasing unemployment usually occurs during recessions and economic
downturns. It has affected investment, GDP growth, and other macroeconomic
factors, and they all impact the banking system. Bank profits may be reduced by
government loan support programs.
The contagion effect occurs when one bank fails and is followed by the
failure of additional banks. When some banks began to fail during the economic
slump, it spread panic and led to financing spikes and bank runs. People's panic also
affects banks that are open normally and has the same effect. Economic recessions
and unemployment often make systemic vulnerabilities in the banking industry
worse.
According to our research, the likelihood of bank collapse rises along with
the GDP rate. This might be because of things like a rise in loan defaults, credit risk,
interest rate risk, and issues with regulatory compliance.
In fact, when the economy is functioning efficiently, businesses seek to
borrow more money to carry out business projects or increase their manufacturing
activities. The growth rate must be kept consistent, though, as if it were to increase,
the risk of default for the bank would also increase as a result of the borrower's
default, which would have an impact on the bank's balance sheet. the loan defaults,
increasing the bank.
Increased GDP rates that result in credit expansion might raise the credit risk
that banks must deal with. Banks will easily be enticed to make riskier lending
decisions with borrowers who have a history of default and low credit scores in
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order to maximize their earnings. After then, if the default rate on those loans rises
too high, the bank may suffer severe losses or perhaps declare bankruptcy.
As GDP growth rates increase, interest rates are expected to rise as well,
which may have an impact on a bank's debt as well as its assets. A bank may be
exposed to interest rate risk due to a large ratio of long-term fixed assets to short-
term liabilities, which could result in losses or, worse, collapse.
Banks may incur higher expenditures for regulatory compliance if GDP rates
rise. As the economy grows, regulators will be more cautious in their oversight of
bank performance to ensure banks' regulatory compliance. As a result, the cost to
banks may rise and have an impact on their earnings, raising the possibility of bank
failure.
However, in most cases, a robust economy with a high GDP rate can
encourage more lending and investment, which ultimately increases the bank's
profit and financial stability. more committed. The likelihood of a bank failing will
decrease from there. Of course, a poor economy with a low GDP rate will result in
less loans, which will result in less investment. As a result, the bank's profit
decreases, placing it in a perilous financial position and raising the likelihood that it
would fail.
An increase in inflation can lead to higher interest rates, lower liquidity, more
loans defaulting, and increasing risks in financial markets, which can increase the
risk of bank failure.
As inflation increases, borrowers' asset values are likely to decline, causing
them to gradually default on their loans. This, in turn, can negatively affect banks'
balance sheets, increasing the risk of bankruptcy.
Additionally, central banks may raise interest rates to contain inflation,
which can reduce bank profits and demand for credit. A depreciating currency due
to inflation can also decrease the bank's asset value and liquidity, increasing the risk
of bank failure.
Furthermore, inflation-related volatility in financial markets can increase
banks' risk exposure and disrupt their operations.
Increasing the fed fund rate effective can reduce the number of banks going
bankrupt for a number of reasons: Risk-taking is controlled, risk is reduced, and
economic conditions are improved.
The cost of borrowing money between banks will increase when the effective
fed fund rate increases, leading to banks having to spend more money when
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borrowing. This may initially cause difficulties for the banks' operations. However,
by increasing the cost of borrowing, the Fed reminds banks to be more cautious in
their lending activities and to control risk-taking behavior to avoid being too lenient
in lending, which can lead to bankruptcy.
Banks may earn less interest because instead of lending money or investing
in higher-yield instruments, they must deposit reserves with the Federal Reserve at
a lower interest rate. However, this will make their loss-buffering zone more certain,
avoiding the risk of insolvency and making it easier for them to overcome the
recession and reduce the likelihood of collapse.
The increase of the effective fed fund rate is a signal from the Federal
Reserve to the market that it believes the economy is improving and that inflation is
the potential risk. As a result, people's confidence increases when they see that the
Federal Reserve is managing risks, and they will increase investment and spending.
Banks can operate in a positive economic environment. A strong economy is less
likely to default, asset values will not be lost, and credit risk will be lower.
Confidence in the effective economy also improves confidence in customers,
investors, and regulators towards banks, making it easier for them to access capital
and increase liquidity. These things enable banks to operate more efficiently,
manage risks more favorably, and avoid insolvency leading to bank runs.
The increase in real interest rates can lead to an increase in the number of
bank bankruptcies for several reasons: increasing borrowing costs, decreasing
profitability, slowing economic growth, and increasing currency prices.
Banks will have to borrow money from other banks, The Federal Reserve, or
the open market when real interest rates increase. However, when real interest rates
increase, the borrowing costs of banks also increase, making their operations less
effective, leading to difficulties in meeting their obligations. They will face the
possibility of bankruptcy when they cannot borrow or refinance their debts.
In addition, the profitability of banks will be significantly reduced when
interest rates increase. Interest income may be reduced because higher interest rates
reduce the demand for borrowing. Securities held by banks may also decrease in
value when interest rates rise, causing the banks to incur losses and leading to
bankruptcy.
The rate of economic growth may be constrained when real interest rates rise,
leading to an economic recession. Consumer and business spending also decreases
as interest rates become higher, leading to slower economic activities. Overdue
debts and bad debts on the bank's balance sheet will increase while the value of
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assets held by banks may decrease due to slower economic growth, which could
lead to the possibility of a bank collapse.
Rising real interest rates cause the currency value of the country to increase.
When its value increases too much, export goods become more expensive than those
of other countries, making them less competitive, leading to a decrease in the
demand for export goods and services of the United States, resulting in a decline in
economic activities, increasing the possibility of bank failures.
For various causes, including higher borrowing rates, slower economic
development, less demand for loans, and deterioration in the quality of banks' assets,
a high unemployment rate can cause numerous banks to fail.
As the Fed funds rate rises, bank loans from other banks, the Federal
Reserve, or the open market become more expensive. Banks might have to pay
more to borrow money as a result, which might have an impact on their
profitability and make it more difficult for them to repay. If banks are unable to
obtain funding or refinance their debt, they may be more vulnerable to
bankruptcy..
With an increase in the Fed funds rate, economic growth may decelerate.
This is because slower economic growth may result from fewer consumer and
business expenditure as a result of increased interest rates. Slowing economic
development may lead to a rise in defaults and a decline in the value of assets held
by banks, raising the possibility of bankruptcy.
The rising Fed fund rate may result in a decline in consumer demand for
borrowing. Lower loan inquiries and lower loan origination may result from higher
interest rates making loans more challenging to repay. Reduced loan demand may
have an impact on banks' profitability, increasing the chance of bank failure.
As the Fed funds rate rises, the value of fixed-income securities owned by
banks could decrease. Bank losses and asset depreciation may result from this. The
likelihood of bank failure may rise as asset quality declines.
Reasons to explain the relationship between these two variables can be
mentioned as: increased risk-taking, asset - liability mismatch, weaknesses in
regulation and supervision, or possibly the impact of external shocks.
Banks will take on more risk as they ramp up lending – that's when risk-
taking increases. If the bank's borrowers are insolvent, have poor credit history, or
if the bank's loan portfolio is focused on a specific sector or industry that is
experiencing financial difficulties, banks will have to bear a huge burden.
17
Asset-liability heterogeneity occurs when a bank borrows a short-term loan

and lends it to someone else for a longer term. Banks will likely face meeting their
obligations to depositors once interest rates rise dramatically on deposit
withdrawals, leading them to potentially go bankrupt.
Weaknesses in regulation and supervision can also be one of the factors that
contribute to bank failure, because when supervisors do not conduct effective stress
tests or regulators are not lax in fulfilling capital requirements, lenders are not
carefully screened, leading to loss of bad debt control, banks will have a higher risk
of bankruptcy.
Bankruptcy can also be caused by external shocks such as a financial crisis
or an economic downturn. Borrowers can become insolvent, leading to an increase
in bad debt (NPL) on the bank's balance sheet. Moreover, it leads to the risk that the
bank's capital buffer will be eroded and increases the probability of bankruptcy.
● Export
Some of the reasons for the potential impact of exports on bank failure
include exposure to global economic conditions, fluctuations in exchange rates,
levels of the risk concentration of certain industries, and the associated effects on
general economic growth.
As one of the world's largest exporters, the United States is one of those
exporters whose economy is tied to global economic conditions. The economic
downturn in the United States will be more severe as the global economy enters a
period of severe recession. When the global economy falls into a recession, people
using goods and services provided by businesses in the United States are unlikely
to become insolvent, leaving businesses in the United States in trouble. and cannot
repay the money they borrowed from the bank for the investment. As a result, the
ratio of bad debt in the balance sheet of the bank increases, leading to a budget
deficit of the bank and possibly leading to bankruptcy when the number of bad debts
exceeds their tolerance.
U.S. businesses that sell goods and services abroad may experience currency
risk when they are paid in foreign currencies like other exporters, due to the effects
of exchange rate fluctuations. The profitability of exporters in the United States
could be affected by significant fluctuations in the dollar, reducing the ability to pay
bank debts.
To deal with economic fluctuations or changes in global trade policy, some
sectors are more vulnerable even though the United States has a wide range of
exports, which is where the risk is concentrated. certain industries. The agricultural
sector, for example, is one of the most vulnerable as key trading partners experience
18
changes in demand. Another aspect is that changes in tariffs and supply chains can
also affect the manufacturing sector. The overall health of the banking industry is
likely to suffer when there is a significant amount of businesses in specific industries
experiencing significant financial difficulties.
While increasing exports can be an important driver of economic growth, if
not managed carefully, it can lead to imbalances. For example, if the United States
becomes too dependent on exports to drive economic growth, it could lead to an
overvalued currency or unsustainable debt levels. Excessive export growth could
exacerbate imbalances in the economy and affect the banking sector.
● Import
Some of the reasons for the negative relationship between import and bank
failures are: the impact of supply chain diversification, access to cheaper products
and inputs, economic growth driven by international trade, and reduced economic
disruption shocks.
One of the reasons is due to the impact of supply chain diversification, which
enables businesses to have access to abundant resources and inputs by importing
goods and services from other countries. This, in turn, makes businesses stronger
when they experience economic shocks or disruptions. Through supply chain
diversification, the risk of financial difficulties or bankruptcy is also reduced,
making it easier for them to pay off their investment loans for their production
business from banks. As a result, the businesses generate revenue and profits, while
banks continue to operate normally, reducing the possibility of bankruptcy.
Another reason why imports and bank failures are negatively related is that
businesses can reduce overall costs and enhance their competitiveness by importing
goods and services from countries with lower production costs. This enables
businesses to access inputs at lower prices, maintain profits, carry out efficient
production and business activities, and pay off bank loans on time and in full. This,
in turn, allows banks to maintain their normal operations, reducing the possibility
of bankruptcy.
International trade also helps to stimulate economic growth by providing new
markets for local businesses, while increasing the overall demand for goods and
services. This, in turn, increases the number of reputable and able borrowers,
making bank profits guaranteed or even increased, which strengthens the banks'
finances.
When a country is open to trade and imports, the economy becomes more
diversified and stable, reducing the risk of economic shocks or disruptions. This
makes banks operate stably and efficiently, and the rate of bank failure decreases.
19
2. Comparison with previous research

From the perspective of the author of this research article, we evaluate the
distinctiveness of this report from other studies in the Literature Review section as
follows:
 Sample size: Our study is relatively more variable compared to others as the
number of variables being considered that affect the main variable is nine.
While our data collection period is not the longest, we have the most recently
updated data compared to other studies. The last year we collected data was
2021.
 Analysis method: This research article uses the basic research method that is
similar to other studies, which is the regression analysis method. However,
in our article, we also use many historical events as a basis to objectively
explain the relationships between variables. Additionally, we examine and
evaluate based on the positive and negative relationships between dependent
and independent variables.
 The quality of the theory: We only stop at the basic theories when we apply
the analysis of this research issue.
 Results: We found that the results of this study are quite similar to other
studies. However, with a greater number of variables and more recent data,
we have shown some new perspectives on the issue of bank bankruptcy.
3. Implications for theory and practice

The Great Recession of 2008–2009 made evident the link between

unemployment rates and bank failure. During this time, the US jobless rate rose
from 5% in December 2007 to 10% in October 2009. To pay off their mortgages, a
lot of people battled and found themselves in terrible situations, which resulted in
20
foreclosures and a startling rise in debt defaults. In addition, investments in

numerous securities backed by mortgages resulted in large losses for banks and
other financial institutions. The failure of important financial organizations like
Bear Stearns or Lehman Brothers has an impact on the whole financial system. Due
to the credit crisis, businesses and individuals had more trouble getting loans, which
made the economic recession worse.
From another perspective, when the unemployment rate is high, it indicates
that the country is experiencing many economic fluctuations. A high unemployment
rate is synonymous with a decrease in the number of workers. When the number of
workers decreases, considering the natural factors of supply and demand of products
in the market, it shows that production output is selling very slowly, or the inventory
is much higher than the amount sold in a certain quarter. That is the time when most
companies will choose to reduce their workforce to cut production costs. In addition,
an increase in the unemployment rate is often a sign of crises or economic
recessions. In the recent event of the bankruptcy of the US SVB bank, according to
data cited from the FED, deposits at US banks decreased sharply by $119 billion.
This shows that during times of recession with many hidden risks, most leaders tend
to hold cash rather than deposit it at the bank. This creates a hidden risk of liquidity
loss for the bank if it has unfavorable information. Additionally, the unemployment
rate affects banks in terms of capital mobilization. When the unemployment rate is
high, it means that people's income is reduced, and therefore, their ability to
mobilize capital for the bank is reduced as well.
To demonstrate the relationship between GDP rate and bank failure, a real-
life example occurred in the United States in the late 2000s, which was the subprime
mortgage crisis. During this period, the GDP rate increased significantly, and the
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economy also developed rapidly, with lending increasing along with the subsequent
increase in investment in the real estate market. The number of mortgage loans
issued, including loans from borrowers with poor credit histories and high default
risks, also increased due to the growth of the real estate market. Later, many
borrowers gradually became unable to repay their debts, leading to the rapid spread
of mortgage defaults as the real estate market reached a recessionary threshold, and
the economy slowed down. As a result, the number of banks and financial
institutions that went bankrupt increased rapidly.
It can be said that bank failures can occur even when the GDP rate is
significantly high, and the economy is doing well because of risky lending and
excessive investment in a specific market. The t-statistic index is 1.35, and the
probability is 0.21, indicating that GDP does not directly affect banks, but it does
not mean that it does not have any impact. It is the source of the increasing risk-
taking behaviors that affect banks. Therefore, we need to consider other variables
besides GDP when analyzing the factors affecting bank failures.
Inflation will cause prices to soar and in the short term, production output
will remain nearly unchanged. Based on the principles of supply and demand, when
prices increase, demand will decrease and supply will increase, leading to surplus
production and social waste. One of the most prominent examples of this was the
Great Depression of 1929, when high prices and continuous production of goods led
to surplus products and a shift in the supply-demand balance, resulting in inflation.
Without control or regulation by the government or central banks, the economy may
be at risk of hampering its development, with one of the factors being severe
currency depreciation. The loss of currency value will lead to imported goods
22
becoming much more expensive, and exported goods becoming much cheaper. The
low prices of exported goods are not necessarily a competitive advantage, but can
also be an underlying threat to the country's economy, as it can lead to domination
by larger economies. Furthermore, rising input costs pose many difficulties for
manufacturing industries. Companies facing higher input costs must choose
between reducing production output or raising prices. Regardless of which option
they choose, companies will still experience reduced revenue, or even report losses
in the period. Some companies will apply additional measures to minimize costs,
such as reducing labor or cutting employee benefits. As a result, not only do
businesses lose some of their income, but workers are also greatly affected. In
addition, when interest rates rise rapidly and wages do not adjust in time to balance
with the cost of goods, many people may be pushed into financial difficulties. For
the banking industry, this is an indirectly affected industry due to the impact of
inflation. Businesses facing difficulties will not have enough money to pay interest
on time or, in the worst case scenario, may lose all or most of the money borrowed
if the business declares bankruptcy. Inflation will push up bank interest rates
because nominal interest rates = real interest rates + inflation. If real interest rates
remain unchanged, increasing inflation will push up nominal interest rates. This will
lead to a situation where banks are more likely to go bankrupt, as explained earlier
in the section on bank interest rates. As banks are a service industry, they will be
indirectly affected.
However, in the opposite direction, deflation, which is also known as
negative inflation, will have a direct impact on the banking industry. During
deflationary periods, basic signs that can be observed include a significant decrease
in GDP, a high unemployment rate, and high bank interest rates in the preceding
period. Deflation will create great pressure in seeking loan sources for banks.
During the deflationary period, the majority of people will focus on depositing
savings to earn higher interest rates from banks instead of using that money to invest
in business development. As this period will almost certainly be a consequence of
the continuous increase in interest rates by the FED, it is also considered one of the
most difficult periods for the banking industry because it needs to balance liquidity,
credit risk, and seek new investment opportunities. One of the most imaginable
scenarios is when the bank is unable to pay the full interest due, leading to the need
to sell assets to make up for the missing interest. This creates concerns for depositors
and sets the stage for bank bankruptcies, as analyzed above. Therefore, both
inflation and deflation have a significant impact on the banking industry. However,
deflation is the direct factor leading to bank bankruptcies. This is because the bank's
23
solvency and inflation indices have an inverse relationship. If inflation decreases

sharply and shifts to deflation, it will directly affect the bank.
We may observe how decreasing the number of bank failures in the years
following the 2008 financial crisis was a result of the effective fed funds rate
increasing. The Federal Reserve had previously slashed the effective federal funds
rate to almost zero in an effort to boost economic expansion and restore stability to
the financial system in the wake of the crisis. However, as the economy started to
improve in 2015, the Federal Reserve started to increase the effective federal funds
rate. As the Fed raised the effective fed funds rate and the number of bank failures
declined, confidence in the economy recovered. This improved the overall condition
of the financial system. Federal Deposit Insurance Corporation (FDIC) statistics
show that 157 banks failed in 2010 and 92 failed in 2011, respectively. Only four
banks had failed by the year 2018 yet.
The conclusion is that the effective increase in the federal funds rate can be
understood as a positive signal for the economy and may lead to increased
confidence in the financial system. By doing so, the likelihood of bank failures can
decrease while improving the overall financial health of banks.

When the ability to recover debts or interest rates is not timely, while the
bank's repayment term to depositors must still be guaranteed, channels can provide
funds to help the bank pay interest, including borrowing from the interbank system
and selling assets. Selling assets is more likely to lead to illiquidity for the bank than
borrowing from the interbank system. The downside of selling assets to resolve a
bank crisis is that it can lead to the bank's collapse, similar to the case of SVB.
24
In a difficult economic situation, banks cannot find new sources of lending.

The amount of cash held in reserve causes the amount of cash supply in the
interbank system to increase. This reduces the interest rate throughout the interbank
system. From this, we can see that when the interbank interest rate decreases, it
indicates a warning about excess money in the banks. This shows that lending or
investment from the money in the bank is being restricted. Money cannot create
money, and interest must still be paid monthly. If the bank is losing profits due to a
lack of repayment, and if the bank's reserves are not enough to cover the amount of
interest that the bank must pay, then a situation similar to the SVB incident will
occur. The clearest evidence is during the period from 2007 to 2017, when the
interbank interest rate continuously decreased, leading to more banks going
bankrupt until the interbank interest rate started to stabilize, and the number of bank
bankruptcies began to stop increasing. From this, we can see the highly inverse
relationship between interbank interest rates and the number of bank bankruptcies.
The interbank interest rate is also an indicator of the health of the economy. When
the economy is strong, the interbank interest rate will be relatively high and tend to
increase. When the economy weakens, this indicator begins to decrease.
We can have two perspectives on the increase/decrease of interbank interest
rates. One is that we will follow the supply-demand model as above. In the second
case, we will explain the direction of the decrease in interbank interest rates to
provide a support fund for banks to overcome difficult periods. In addition, this is
also a source of funds to help banks avoid falling into a liquidity crisis during
difficult times.
The impact of changes in the Fed's Fund rate on banks can be seen through
events such as the failure of Guaranty Bank in 2017. This Texas-based bank had a
large concentration of loans in the construction and energy sectors, and as the Fed's
Fund rate increased and oil prices fell, the bank experienced mounting loan losses
and decreased profitability. Guaranty Bank's failure resulted in a loss of $146.6
million for the FDIC insurance fund.
Another example is the banking system collapse from 2007 to 2010. During
this period, the Fed rapidly and continuously lowered interest rates, which led to
many banks falling into a state of default. In 2008, when the Fed sharply lowered
the basic interest rate, there were 25 banks that defaulted, which was eight times
higher than the number of defaults in 2007. The impact of the Fed's rate reduction
speed was significant and lasted for many years, with many serious consequences.
25
From 2009 to 2011, the number of bank defaults was particularly high, with 140,
157, and 92 defaults, respectively.
The Fed's basic interest rate can be thought of as raw materials for
manufacturing businesses. When commercial banks lend money, they use the basic
interest rate to start calculating their lending rate. Increasing or decreasing the Fed's
basic interest rate can affect the lending rate of the bank, but it also brings two risks
to the bank. With increasing interest rates, the bank faces the risk of paying interest
to depositors. However, increasing the basic interest rate too quickly can also lead
to liquidity problems for the bank, which will impact businesses, as seen in the
example of SVB.
In general, increasing the Fed's Fund rate can negatively impact banks'
financial management abilities and increase the risk of bank failures. The
relationship between the Fed's Fund rate and bank failures is complex, and other
factors such as the state of the economy and government actions can also have a
significant impact.
The 2008 subprime mortgage crisis in the United States provides an example
of how the expansion of bank lending can result in bank failure. Low credit score
subprime customers received loans from banks with an uncontrollably higher risk.
These loans are frequently packaged together and offered as security with a
mortgage guarantee to investors. Sadly, these subprime borrowers found themselves
unable to pay back their debts, especially as interest rates increased and home prices
dropped. Due to the erosion of its capital buffer, the bank has suffered as a result of
the rise in bad debt on its balance sheet. In addition, several banks have used short-
term borrowing to fund their lending activities through securitization or the
interbank market. Investors started to doubt the quality of these loans, which caused
the market for these instruments to collapse and made the bank's short-term capital
unrecoverable. As a result, a number of significant banks, including Washington
Mutual, Bear Stearns, and Lehman Brothers, filed for bankruptcy or were forced to
26
consolidate. Numerous other small banks and credit unions across the country also
filed for bankruptcy as a result of it.
It can be said that the bank's bankruptcy can be affected by the sudden
increase in credit and the lack of careful management. Effective regulation and
supervision of the banking system to prevent excessive risk-taking as well as
maintain financial stability is extremely important..
However, if the credit growth rate is too fast and somewhat unreasonable, it
indicates risks in the bank's lending. If bank credit increases dramatically in a weak
economic development environment, it shows that the bank may be lending easily
to increase bank credit. Easy lending carries a high risk when the possibility of
default is high. Therefore, when considering bank credit, it should be examined
together with the general economic situation. Besides, if examined under normal
conditions and a good economic development environment, if bank credit increases,
the bank's bankruptcy rate will decrease. This demonstrates an inverse relationship
between the bank's bankruptcy ability and the amount of bank credit.
● Export
The impact of a decrease in the US economy's need for exports due to the
2008 – 2009 global economic downturn is an example of how the banking industry
can be significantly affected. Companies that heavily rely on exports can face
financial challenges, leading to an increase in delinquent obligations or defaults. As
a result, banks holding significant amounts of debt from these companies may
experience rising delinquency and bad debt, forcing them to write off or reduce
27
these loans. This can decrease their capital positions and raise the risk of a collapse,
as seen during the global financial crisis. Managing the risks and vulnerabilities of
increasing exports is crucial for ensuring long-term sustainable and advantageous
export-led development for the banking industry and the economy. This can be
achieved by controlling currency and debt risks and avoiding imbalances in the
overall economy.
● Import
The auto sector, which has relied on imports for the past few decades in the
United States, is an illustration of this relationship. However, by importing less
expensive parts and components from nations like China or Mexico, this trend also
helps to reduce costs and improve overall competitiveness while maximizing the
profits of American automakers. This trend raises concerns that it will result in job
losses for Americans and have an impact on domestic manufacturers. Businesses
avoid financial problems as a result, make timely debt payments, and reduce the
chance that banks may be impacted.
Although there is a complicated and nuanced relationship between imports
and bank failures in the US since 2000, there are a number of situations when
imports can help decrease bank failures through cost savings, competitiveness, and
economic growth.
Conclusion
1. Summary of key findings:

● Unemployment rate: Significant positive relationship with bank failures.
Reasons are (1) increase in loan defaults, (2) exhaustion of countercyclical
28
capital buffers, (3) decreased demand and revenue, (4) macroeconomic

impacts, and (5) contagion effects.
● GDP rate: Positive relationship with bank failures but it is not statistically
significant, does not have a direct impact on bank failures. Reasons are (1)
increase in loan defaults, (2) credit risk, (3) interest rate risk, and (4)
regulatory compliance problems.
● Inflation rate: Positive relationship with bank failures but it is not statistically
increase in loan defaults, (2) higher interest rates, (3) reduction in liquidity,
and (4) increased risks in financial markets.
● Effective federal funds rate: Negative relationship with bank failures but it is
not statistically significant, does not have a direct impact on bank failures.
Reasons are (1) control of risk-taking, (2) reduction of risk, and (3)
improvement of economic conditions.
● Real interest rate: Positive relationship with bank failures but it is not
statistically significant, does not have a direct impact on bank failures.
Reasons are (1) increase in borrowing costs, (2) decrease in profitability, (3)
slowing economic growth, and (4) increase in currency prices.
● Federal funds rate change: Positive relationship with bank failures but it is
not statistically significant, does not have a direct impact on bank failures.
Reasons are (1) Increase in borrowing costs, (2) decrease in demand for
loans, (3) decrease in economic growth rate, and (4) deterioration in the asset
quality of banks.
● Bank credit: Positive relationship with bank failures but it is not statistically
increase in risk-taking, (2) asset - liability mismatch, (3) weaknesses in
regulation and supervision, or (4) possibly the impact of external shocks.
● Exports: Positive relationship with bank failures but it is not statistically
exposure to global economic conditions, (2) fluctuations in exchange rates,
(3) levels of the risk concentration of certain industries, and (4) the associated
effects on general economic growth.
● Import: Negative relationship with bank failures but it is not statistically
the impact of supply chain diversification, (2) access to cheaper products and
inputs, (3) economic growth driven by international trade, and (4) reduced
economic disruption shocks.
29
In conclusion, the research' findings indicate that the only variable with a
statistically significant correlation to bank failure is the unemployment rate. Other
factors don't appear to be directly related to bank failure. Their connection to bank
collapses appears to be influenced by the environment and state of the economy.
2. Implications for theory and practice

Based on the statistics, we will divide into two main groups, those who are
most affected by bank bankruptcy. We will give advice to help these groups limit
the damage to the economy and reduce the number of bank bankruptcies to a
minimum during the period of economic fluctuations:
Group one includes individuals and organizations who are depositing money
at the bank: When the economy is in recession or in a negative state of volatility,
individuals and organizations depositing money should act cautiously in deciding
to withdraw or deposit money in the bank. During the period of economic decline,
no one can predict what will happen tomorrow. Every action we take can lead to
some consequences for the bank. This is similar to the butterfly effect theory of
Mathematician Edward Norton Lorenz, a pioneer of chaos theory. When every small
action can lead to enormous disasters like "Just a butterfly flapping its wings in
Brazil can cause a tornado in Texas" in a 1972 presentation titled "Does the flap of
a butterfly’s wings in Brazil set off a tornado in Texas?" of Edward Lorenz. Based
on that effect, if individuals or businesses withdraw money abruptly, it can lead to
the bank's bankruptcy and cause a contagion effect in the banking system, ultimately
leading to the collapse of the banking system. Therefore, we need to slow down to
think carefully about our decisions. In addition, one of the most important things is
that we must try to remain calm in the face of the crowd's panic. Most bank failures
are due to the panic of the crowd leading to the hoarding of money, causing the bank
to lose liquidity and leading to bankruptcy. In summary, my advice for group one is
to stay calm in the face of economic fluctuations, try to maintain their common.
(Abata, 2014; ALMANSOUR et al., 2021; Cox & Wang, 2014)
Group two is banks: When the economy has many fluctuations, both negative
and positive, banks should put themselves in a state of overconfidence. This is one
of the most dangerous psychological effects for the banking industry. According to
Daniel Kahneman, an economist, who explained the study of the overconfidence
effect in "Thinking, Fast and Slow" in 2011. He said that the confidence, optimism,
and excessive positivity are one of the most serious cognitive biases of human
perception. When he evaluated that in some cases, people are often too confident in
their own abilities and ignore external factors. From there, it is easy to make
30
incorrect decisions. To avoid this, banks should have a clear and objective view of
their financial situation, their potential risks, and the market situation. Banks should
also focus on liquidity management and carefully consider the decisions that affect
their liquidity position. In addition, banks should also be transparent with their
customers and stakeholders about their financial situation and potential risks. This
will help build trust and avoid panic among customers and stakeholders, thereby
limiting the contagion effect in the banking system.
3. Contribution to the field

Through this research, we can understand simply about the direct and indirect
impacts between the factors affecting the bank. This provides a general foundation
for indicators that can predict the likelihood of bank default. For example, the Fed's
interest rate increase rate indicator can show us the risk of bank default. For instance,
currently, when the interest rate increase rate is extremely high, as in 2022 when the
Fed raised the basic interest rate by more than 4.0%, based on the results of the
study, we can see that the bank default rate is increasing. Evidence shows that two
US banks, Silicon Valley Bank (SVB) and Signature Bank, have gone bankrupt
when the Fed raised interest rates continuously like this. Among them, SVB is
considered a good and safe bank because most of its assets are invested in
government bonds. Therefore, when the Fed raised interest rates suddenly, it caused
the bond prices to plummet and led to a decline in SVB's assets, as explained in the
section on the FED fund rate change above. From there, it shows the accuracy and
practicality of these indicators in reality.
This report is helping readers to have a comprehensive understanding of the
impact of the variables being considered on the bank, thereby helping them to make
informed decisions in different phases of the economy. In addition, the main
purpose of this report is to help readers enhance their independent thinking ability
and minimize the impact of herd behavior, thereby reducing the damage and
possibility of bankruptcy for the bank. One of the main factors causing bank
bankruptcy is liquidity loss caused by the mass withdrawal of customers. This mass
withdrawal is often caused by contagion or herd effect. When we see someone
withdraw a large amount of money from the bank and the bank takes actions such
as liquidating some assets or making adjustments to asset structure, there will be
people evaluating the possibility of loss of the assets they have deposited in the
bank. These evaluations cause anxiety for the evaluators and they withdraw their
money from the bank. When they withdraw a large amount of money from the bank,
it can cause temporary illiquidity for the bank. This temporary illiquidity can cause
31
anxiety and panic for other customers, making them anxious and fearful. From there,
it causes mass withdrawals from the bank and leads to complete illiquidity for the
bank. This leads to the bankruptcy of the bank. Through this report, we want to
provide a foundational knowledge as well as intuitive examples to help readers stay
calm and analyze the situation accurately regarding the phenomena of the bank. As
the number of people who understand banks and the factors leading to bank
bankruptcy increases, the possibility of bank bankruptcy is expected to decrease.
With macroeconomic data and some basic relative data, we aim to help
readers analyze on their own based on the indices easily found on government news
pages. With easily accessible data, we hope readers can evaluate the economy as
well as the state of the bank at that time by themselves. In addition, with accessible
data sources and central bank monetary policies, readers can reinforce their
psychology before major economic fluctuations.
For researchers studying the risks that could lead to bank bankruptcies, this
research article can help them visualize in the most basic way how certain external
or internal indicators can affect the bank. In addition, through this research, we hope
to provide a multidimensional perspective to support future research with different
economic phases. Moreover, for new policies, this report can serve as a measure or
a suggestion to adjust policies before they are publicly released. As a result, the
government or central bank can achieve the best effectiveness and reduce unwanted
losses.
4. Limitations and future research directions:

For this research, some limitations can be mentioned such as:
● Data: The data access source is still limited and not detailed enough. The
level of detail of the data only stops at the level of data collected annually.
● Factors causing bank failures: The factors are still limited due to the ability
to collect data on other factors that still have many shortcomings. In addition,
the limited number of factors is due to the writer's perspective and personal
views leading to shortcomings in selecting variables.
● In terms of the reasoning aspect, the report only stops at the level of inference
and analysis within the time frame being considered and links to current
events, but has not yet provided a specific measure of the data. The limitation
of the data has affected the analyzed figures on the ratio as well as the degree
of influence. In this report, only analyses based on trends and the covariate
nature of the dependent and independent variables are presented.
32
● Regarding the theoretical aspect, this report is based on fundamental

economic theories such as supply and demand theory, inflation theory, and
GDP theory. Additionally, this report is written based on personal
perspectives and optimistic attitudes, so it may underestimate or overestimate
certain events or situations.
To develop this report in the future, we hope to expand the data source. More
detailed and accurate data will make the assessments more realistic and applicable.
33
References
Abata, M. A. (2014). Asset quality and bank performance: A study of commercial
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Factors Affect Bank Failure

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Factors Affect Bank Failure

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Methods of Economic Analysis

Instructor: Prof. Park Kee Hwan

1. Background and context

4. Importance and significance of the study

economic impact of bank failures, policymakers and regulatory bodies can

5. Outline of the paper

1. Overview of the field of study

2. Synthesis of the relevant literature and Critique of previous research

3. Gaps in the literature

2. Sampling and sample size

3. Data collection methods and procedures

4. Data analysis methods

5. Limitations and delimitations

1. Description of the sample

The strength and direction of the relationship between independent variables

Variable Coefficient Standard Error t – Statistic Probability

● Unemployment rate – UNR

Asset-liability heterogeneity occurs when a bank borrows a short-term loan

2. Comparison with previous research

3. Implications for theory and practice

The Great Recession of 2008–2009 made evident the link between

foreclosures and a startling rise in debt defaults. In addition, investments in

solvency and inflation indices have an inverse relationship. If inflation decreases

● Real interest rate – RIR

In a difficult economic situation, banks cannot find new sources of lending.

1. Summary of key findings:

capital buffers, (3) decreased demand and revenue, (4) macroeconomic

2. Implications for theory and practice

3. Contribution to the field

4. Limitations and future research directions:

● Regarding the theoretical aspect, this report is based on fundamental

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