Liquidity Mismatch Helps Predict Bank Failure And Distress

from the Dallas Fed

Commercial bank failures increased dramatically in recent years, while numerous other banks became distressed, as measured by high ratios of nonperforming assets to equity and loan loss reserves. The quarterly failure rate of banks peaked at 0.6 percent in second quarter 2009. The combined failure and distress rate reached 2.5 percent in fourth quarter 2010 – the highest level since the 1980s.

Bank failures are costly, so regulators want to understand the reasons for them and how they may be prevented.2 One possible reason for the heightened failure and distress rate is the large – possibly excessive – rise in liquidity mismatch in the mid-2000s.

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Source: http://www.dallasfed.org/assets/documents/research/eclett/2015/el1506.pdf