Federal deposit insurance coverage and bank failures: A cointegration analysis with semi-annual data, 1965–91 |
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Authors: | Ira Saltz |
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Institution: | (1) Department of Economics and Finance, University of Central Arkansas, 72032 Conway, AR |
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Abstract: | This study examines empirically the link between bank failures and statutorially created increases in the extent of federal
deposit insurance coverage. The model includes such factors as the percentage of deposits at federally insured banks that
was covered by federal deposit insurance (FDICOV), the tangible capital/asset ratio, the commercial bank cost of funds, and
the prime rate of interest. Using cointegration techniques involving maximum eigenvalue, trace, and likelihood ratio tests,
together with semi-annual data for 1965–91, the study reveals that the bank failure rate is cointegrated with FDICOV, the
capital/asset ratio, and the commercial bank cost of funds. Accordingly, it is inferred that—consistent with previous studies—the
system of federal deposit insurance very likely induced bank failures during the study period. |
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Keywords: | |
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