Financial rations as predictors of bank failure in Kansas.

Abstract

Through 1985 and into 1986, Kansas communities suffered failure of their banking institutions in record numbers. The number of bank failures in Kansas, Nebraska, and Oklahoma were equal in 1985 and led the nation. The Federal Deposit Insurance Corporation (FDIC) was involved in each of the failures of banks serving Kansas communities. In each instance of failure, the FDIC cited financial difficulties as the cause for intervention by the FDIC. Therefore financial ratios were the focus of the study. It was found that loans as a percentage of deposits combined with equity as a percentage of assets were associated with bank failure. These two ratios were observed in a total of 55 out of 60 cases of bank failures. These numbers are based upon three annual statements of conditions preceding failure. One year prior to failure, these ratios were associated with failed banks in 19 of 20 cases. This thesis is an analysis of the causes for these failures and factors predicting them.