Title: Risk taking by US banks led to their failures

Authors: Grace W.Y. Wang; Raymond A.K. Cox

Addresses: Department of Maritime Administration, Texas A&M University, Galveston, 200 Seawolf Parkway P.O. Box 1675, Galveston, TX 77553-1675, USA ' University of Northern British Columbia, 3333 University Way, Prince George, British Columbia, V2N 4Z9, Canada

Abstract: This research studies why commercial banks in the USA failed in the recent financial crisis from the aspect of risk taking by the financial institutions. First, lending risks come from the choice of illiquid assets that affect the quality of loans. Second, risk of securitisation is rooted in the implicit recourse, backstop of liquidity, balance sheet overexpansion, and the moral hazard problem. Third, the systemic risk from the overall economic conditions was ubiquitous when market liquidity intertwined with the funding liquidity. Indicators are provided that distinguish surviving banks from their failed peers which serve as the early warning signals that predict banking failures. Given that, this study provides policy options which will contribute to greater stability in the banking sector in a future financial market and economic crisis.

Keywords: bank failures; warning systems; financial services; risk taking; US banks; banking industry; USA; United States; commercial banks; financial crisis; lending risks; illiquid assets; loan quality; securitisation risk; implicit recourse; liquidity backstop; balance sheet overexpansion; moral hazard; systemic risk.

DOI: 10.1504/IJFSM.2013.052877

International Journal of Financial Services Management, 2013 Vol.6 No.1, pp.39 - 59

Received: 07 Jan 2012
Accepted: 12 May 2012

Published online: 13 Sep 2014 *

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