The UK's small banks' crisis of the early 1990s: what were the leading indicators of failure?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 25 July 2001

Working Paper no. 139
By Andrew Logan

The announcement of BCCI’s closure on 5 July 1991 rapidly accelerated the withdrawal of wholesale funds from small and medium-sized UK banks. Within three years, a quarter of the banks in this sector, had in some sense, failed. This study employs a logit model to analyse at two points prior to the crisis the distinct characteristics of the banks that failed compared with those that survived. Perhaps not surprisingly, a number of measures of bank weakness — low loan growth, poor profitability and illiquidity — are found to be good short-term predictors of failure, as are a high dependence on net interest income and low leverage. The best longer-term leading indicator of future failure, however, is rapid loan growth at the peak of the previous boom.

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