Macroeconomic shocks and bank failure

Utilizing a time-varying hazard model to analyze the bank-level data in the U.S over the period from 1977 to 2013, we identify the channels through which macroeconomic shocks affect bank failure. We find that bank-specific characteristics are more essential in predicting bank failure, and banking industry market performance and systematic funding risk are also significant predictors of bank failure. An economic recession would exacerbate bank asset quality and significantly increase failure likelihood of banks with higher ratio of non-performing loans, while a shock of interest rates makes those banks heavily relying on purchased funds much more susceptible to failure. These findings have important implications for policy makers and for those engaged in bank risk management, and provide new empirical evidence in support of the robustness of CAMELS regulatory framework.