The Determinants of Bank Failure: Evidence from the Dutch Financial Crisis of the 1920s

Why do some banks fail and others survive in financial crises? This paper answers this question by examining the causes of the Dutch financial crisis of the 1920s. Accounting and corporate governance data pertaining to 151 banks are collected for the period immediately prior to this crisis. Discrete choice models are then used to predict bank distress in the period 1920-1927. This paper finds that banks had a higher probability of experiencing distress if they were younger and bigger, and had high levels of deposits outstanding.  Additionally we find that banks which had more of their equity capital paid up, were more likely to go into distress. We find that banks which had a multitude of interlocks with non-financial corporations were less likely to experience distress. However characteristics of the interlock such as size, profitability and leverage do increase the probability that a bank experienced distress. Additionally we are able to distinguish between different types of bank failures; we find that banks with larger boards were more likely to be liquidated. Additionally we find that banks which had more of their equity capital paid up were more likely to be liquidated, rather than merged or reorganised. These findings not only improve our understanding of this particular crisis, but also provide evidence for financial economists interested in the efficacy of corporate governance structures and practices in the absence of formal banking regulation.