On November 25, the New York Fed released a study analyzing the causes of bank failures. The study postulated the primary reason for such failures was a deterioration of bank fundamentals leading to insolvency. Examining data from 1865 to 2023, the study found that bank failures were highly predictable and were typically preceded by the erosion of solvency; the realization of credit risk reduced income and eroded capital buffers. Although this resulted ultimately in either a bank run or a supervisory decision to close the bank, the study concluded that the bank runs themselves were not a common cause of bank failures — even before the FDIC’s establishment.

The authors’ conclusion was based on an analysis of three testable predictions for bank runs: (i) significant deposit outflows before failure; (ii) high asset recovery rates if the bank was solvent before the run; and (iii) a “modest” predictability of failure. Using historical data dating back to 1865, the study indicated that most failures were likely caused by asset losses and deteriorating solvency, and failure likely would have occurred even in the absence of deposit outflows.  The study also noted that depositors and supervisors were often slow to react to signs of distress, which made bank failures predictable. The policy implications of these findings emphasized the need for proactive measures to prevent bank failures, such as limiting dividend payouts and ensuring banks are well-capitalized. Additionally, the authors suggested that interventions should address fundamental solvency issues rather than backstopping liquidity only.