Bank Failures, Risk Monitoring and the Market for Bank Control

Abstract

Not since the Great Depression has there been such concern in the popular press about the fundamental stability of the banking industry. This apparent decline in public confidence stems from the unprecedented increase in the incidence of bank failures during the past decade. From 1946 to 1984 the average failure rate for banks was a modest .07%, but from 1984 to 1987 this rate increased five-fold to .37%. Although this failure rate is still quite small compared with the failure rate for firms throughout the rest of the economy, the large stake that the federal government has in the financial stability of banks, and the widespread perception that healthy banks are especially important to the economy, suggest that concern about the increasing incidence of bank failures is warranted.