Uncertain Times and Early Predictions of Bank Failure

The Great Financial Crisis shows that bank failure in the United States, while rare, is a concern during uncertain times. Our interest is in the ability to predict future failures at the start of a crisis, when the recent past has few events on which to base our inferences. We show that policymakers using estimates based on the S & L crisis would identify in early 2009 that 2.0% of banks were in critical condition and 7.0% were unhealthy. This is comparable to the 1.7% of banks that failed within a year and the 3.9% of banks that would fail during the crisis