The impact of bank failures on local bank pricing decisions

This paper empirically tests for the existence of bank contagion at the local level. More specifically, bank-specific data for thirteen counties in Colorado and Kansas is used to perform regression analysis to test the hypothesis that the uninsured CD pricing behavior of a failing bank affects the prefailure uninsured CD pricing behavior of solvent banks within the same county as the failing institution. Quarterly data from the second quarter of 1987 through the first quarter of 1994 produce regression results that support the hypothesis. Thus, this study finds evidence of firm-specific bank contagion at a local level and extends existing contagion literature beyond an investigation of large failures during periods of crisis.