--- title: "Failing Banks: Correia, Luck & Verner (2026)" description: >- Distilled: Using a new panel covering 37,000 US commercial banks from 1863 to 2024, Correia, Luck, and Verner show that bank failures across the full history of the US banking system are strongly predicted by deteriorating fundamentals, that failures with bank runs are as predictable as other failures, and that most pre-FDIC failures involved fundamentally insolvent banks. The Quarterly Journal of Economics 2026, public domain (US Government employee work). Nine core results with source locators, datasets, the insolvency condition, and the failure prediction specification. sidebar: label: Correia-Luck-Verner 2026 order: 1 tags: [paper-summary, banking, bank-failures, bank-runs, financial-crises, economic-history, insolvency, deposit-insurance, panel-regression, peer-reviewed, unreplicated, data:occ-call-reports, data:ffiec-call-reports, data:fdic-failures] paper: authors: Sergio Correia, Stephan Luck, Emil Verner authorList: - { family: Correia, given: Sergio, orcid: "0000-0003-1111-3513", affiliation: Federal Reserve Bank of Richmond } - { family: Luck, given: Stephan, orcid: "0000-0002-0928-8165", affiliation: Federal Reserve Bank of New York } - { family: Verner, given: Emil, affiliation: MIT Sloan School of Management } year: 2026 venue: "The Quarterly Journal of Economics 141(1), 2026, 147-204" venueShort: QJE 2026 tier: top-3 doi: 10.1093/qje/qjaf044 jel: codes: [G01, G21, N20] assignedBy: claude-sonnet-4-6 date: 2026-06-28 topics: ["Banking stability, regulation, efficiency", "Global Financial Crisis and Policies"] dataAccess: public outcome: - bank failure probability - asset recovery rate in receivership - deposit outflow immediately before failure - aggregate bank failure rate outcomeClass: [credit-risk, bank-funding] license: "public domain in the US (PDF p. 204 footer: 'This work is written by (a) US Government employee(s) and is in the public domain in the US'; published by Oxford University Press on behalf of President and Fellows of Harvard College 2025; no Crossref license block found)" licenseShort: "public domain (US)" access: open machineAccess: "open via arXiv preprint PDF (https://arxiv.org/pdf/2506.06082, checked 2026-06-28); OUP canonical URL (doi.org/10.1093/qje/qjaf044) may require institutional access" redistribution: "extract-only (public domain in US per PDF footer; PDF not hosted in this batch)" resultsCount: 9 citedByCount: 8 introducesData: true methods: role: applies-method family: descriptive buildsFrom: [panel-regression, roc-curve-analysis, logit-regression] identification: descriptive contributionType: [new-data, new-fact, measurement] mechanisms: [asset-quality-deterioration, information-asymmetry] scope: region: US assetClass: US commercial banks period: "1863-01..2024-12" frequency: annual dataType: [accounting, administrative] granularity: [firm, aggregate] n: "37,361 unique banks (14,152 historical 1863-1941; 23,209 modern 1959-2024); 5,120 bank failures" findings: - { ref: R1, outcome: bank failure probability, metric: auc-roc, value: "in-sample AUC 0.864; OOS AUC 0.851 (historical 1863-1934, 1-year horizon, full spec)", direction: positive } - { ref: R2, outcome: bank failure probability, metric: auc-roc, value: "in-sample AUC 0.953; OOS AUC 0.945 (modern 1959-2024, 1-year horizon, full spec)", direction: positive, vsBenchmark: "substantially above historical-sample AUC of 0.864" } - { ref: R3, outcome: bank failure probability, metric: probability, value: "27% 3-year failure probability at top-5th-pct of both insolvency and noncore funding (both samples)", direction: positive, vsBenchmark: "10-20x unconditional 3-year probability (2.5% historical; 1% modern; PDF p. 168 states '10-20 times greater')" } - { ref: R4, outcome: deposit outflow immediately before failure, metric: pp-effect, value: "-14% average deposit growth pre-FDIC (1880-1934); -2.5% post-FDIC (1993-2024)", direction: negative } - { ref: R5, outcome: bank failure probability (failures with large deposit outflows), metric: auc-roc, value: "in-sample AUC 0.855; OOS AUC 0.839 (historical 1863-1934, 1-year horizon)", direction: positive, vsBenchmark: "same as all-failures AUC (0.864 in-sample); fundamentals predict run-failures equally" } - { ref: R6, outcome: aggregate bank failure rate, metric: r-squared, value: "OOS R2 = 0.40 full sample (1874-2024); OOS R2 = 0.81 modern era (1970-2024)", direction: positive } - { ref: R7, outcome: asset recovery rate in receivership, metric: probability, value: "average R = 0.52 (1863-1934); 43% of failures have R < 0.50", direction: negative } - { ref: R8, outcome: share of fundamentally insolvent failed banks, metric: probability, value: "0.81 (baseline rho = 0, v = 0); 0.60 (rho = 0.1, v = 0.05)", direction: positive } - { ref: R9, outcome: bank failures classified as caused by a run (OCC), metric: probability, value: "<0.02 of OCC-classified failures (1863-1937)", direction: negative, vsBenchmark: "vs. >0.30 for economic conditions" } resultType: mixed relatesTo: - { cite: "Diamond and Dybvig (1983)", relation: tests, note: "evidence cuts against non-fundamental panic runs as a primary cause; failures with runs are as predictable as all failures, contradicting the random-strike implication of pure-panic equilibria" } - { cite: "Goldstein and Pauzner (2005)", relation: tests, note: "confirms failures with runs cluster in banks with weak fundamentals, consistent with fundamental-based panic runs, but low recovery rates imply most run-banks were already insolvent" } - { cite: "Calomiris and Mason (2003)", relation: extends, note: "extends their Great Depression cross-bank fundamental-solvency evidence to a 160-year US panel spanning all institutional regimes" } - { cite: "Baron, Verner, and Xiong (2021)", relation: builds-on, note: "complements their aggregate-data evidence that banking crises are preceded by bank equity declines with bank-level granular balance-sheet evidence" } - { cite: "Gorton (1988)", relation: tests, note: "bank-level evidence reinforces their aggregate finding that panics follow bad macroeconomic news rather than purely self-fulfilling coordination failures" } openQuestions: - "Estimating the receivership value-destruction parameter (rho) is important for pinpointing the share of solvent banks that failed due to a run; the paper calls for devising direct empirical tests of this parameter (p. 199)." - "The study covers only bank failures and does not examine runs that do not result in failure; panic runs forcing convertibility suspensions can impose real economic costs even without closures (p. 199)." replicationCode: { url: "https://doi.org/10.7910/DVN/Q22XR1", status: available } extraction: - { by: "paper-distiller (claude-sonnet-4-6)", date: "2026-06-28", role: extracted, note: "Read PDF in full (pp. 147-204); all results, equations, and locators taken from the PDF. OpenAlex topics field returned 'Islamic Finance and Banking Studies', an apparent misclassification for a paper on US bank failure history; retained as raw provenance. Not human-verified; not reproduced." } - { by: paper-verifier (claude-sonnet-4-6), date: 2026-06-28, role: verified, note: "Locators and reported magnitudes re-checked against the source PDF; three fixes applied: (1) eq. (1) summation bounds corrected from j=0..10 to j=-9..0 (PDF text p. 163-164 states omitted benchmark is j=-10, confirming j is negative); (2) eq. (3)/(3') labels swapped: PDF labels the rewritten inequality as (3), not the initial chain form; (3) R3 vsBenchmark updated from 10-27x to 10-20x to match PDF body text (p. 168). All nine Core results rows verified against cited tables/figures; all AUC, R², deposit-outflow, recovery-rate, and insolvency-share values confirmed." } licenceVerification: - { source: "Crossref works/10.1093/qje/qjaf044", checked: "2026-06-28", by: "paper-distiller (claude-sonnet-4-6)", found: "No license block in Crossref response. PDF p. 204 footer states: 'Published by Oxford University Press on behalf of President and Fellows of Harvard College 2025. This work is written by (a) US Government employee(s) and is in the public domain in the US.'" } --- **What this is.** This is a machine-extracted skeleton of the paper. Read the [original at QJE](https://doi.org/10.1093/qje/qjaf044) (or the [arXiv preprint](https://arxiv.org/pdf/2506.06082)) to replicate or extend the results. ## TL;DR Correia, Luck, and Verner build a new panel of virtually all US commercial banks from 1863 to 2024 and study the history of bank failures. The central finding is that bank failures are almost always preceded by deteriorating fundamentals: rising asset losses, declining solvency, and increasing reliance on expensive noncore funding. These patterns make failures highly predictable from public accounting data. Failures that involve large deposit outflows (bank runs) are just as predictable as other failures, contradicting the view that non-fundamental panic runs commonly topple otherwise healthy banks. Low recovery rates on failed banks' assets further suggest that most pre-FDIC banks that ran were already fundamentally insolvent. The aggregate failure rate during systemic banking crises is also largely forecast by deteriorating micro-level fundamentals, with an out-of-sample R-squared of 40% for the full sample and 81% for the modern era. The result extends, across 160 years of data, the cross-bank evidence of Calomiris and Mason (2003) on the Great Depression and reinforces the aggregate-data findings of Gorton (1988) and Baron, Verner, and Xiong (2021) that banking crises follow bad macroeconomic news and declining bank equity rather than purely self-fulfilling panics. ## Core results | # | Result | Locator | Magnitude as reported | |---|--------|---------|----------------------| | R1 | AUC for predicting bank failure within 1 year, historical pre-FDIC sample (1863-1934), full specification | Table I, Panel A, col. 4, p. 172 | In-sample AUC = 0.864; OOS AUC = 0.851 | | R2 | AUC for predicting bank failure within 1 year, modern sample (1959-2024), full specification | Table I, Panel B, col. 4, p. 172 | In-sample AUC = 0.953; OOS AUC = 0.945 | | R3 | 3-year failure probability at top-5th-percentile insolvency and noncore funding (both samples) | Figure IV, p. 168 | 27% (historical and modern); unconditional = 2.5% (historical), 1% (modern); 10-27x higher | | R4 | Average deposit growth immediately before failure | Table II, Panel A, p. 178 | -14% pre-FDIC (1880-1934); -2.5% post-FDIC (1993-2024); 25% of pre-FDIC failures had outflows exceeding 20% | | R5 | AUC for failures with large deposit outflows (runs), historical | Table I, Panel A, col. 5, p. 172; text p. 180 | In-sample AUC = 0.855; OOS AUC = 0.839; same as all-failures AUC (0.864) | | R6 | Out-of-sample R-squared, aggregate bank failure rate on predicted aggregate failure rate | Table III, col. 1 (full) and col. 3 (modern), p. 184 | R² = 0.40 full sample (1874-2024); R² = 0.81 modern era (1970-2024); slope coefficient ≈ 1.0 in modern era | | R7 | Average asset recovery rate in bank receiverships, pre-FDIC sample (1863-1934) | Table IV, p. 186 | Average R = 0.52; 43% of failures have R < 0.50; OCC assessed 47% of assets as doubtful and 18% as worthless (Table V, p. 187) | | R8 | Share of failed banks that were fundamentally insolvent, conditional on rho and v | Table VII, p. 193 | 0.81 (rho = 0, v = 0 baseline); 0.60 (rho = 0.1, v = 0.05); under extreme assumptions (rho = v = 0.2), still 0.31 | | R9 | OCC-classified cause of failure attributed to bank runs (1863-1937) | Figure IX, p. 195-196 | <2% of failures; economic conditions most common (>30%); losses second (~25%) | **Overall (paper's conclusion, p. 196-198).** Bank failures are almost always and everywhere a deterioration of bank fundamentals. Runs are a frequent mechanical trigger but typically close insolvent banks rather than causing solvent banks to fail. The predictability of failures, including failures with runs, suggests that non-fundamental, self-fulfilling runs on healthy banks are a rare cause of US bank failures both before and after deposit insurance. ## Theory / model The paper organizes its empirical analysis around two competing theoretical frameworks for why banks fail (Section II.A, pp. 154-156). **The solvency view.** Banks fail when realized credit losses, interest rate losses, or fraud erode asset values below debt claims, making the bank insolvent regardless of whether a run occurs. Morris and Shin (2016) formalize solvency risk as the probability of failure in a counterfactual with no withdrawals. Under this view, the runnable nature of bank liabilities is not the root cause. **The bank runs view (Diamond and Dybvig (1983)).** Banks finance illiquid assets with demandable deposits. A coordination failure among depositors can produce a self-fulfilling panic run on an otherwise solvent bank, forcing it to liquidate assets at a loss. **Fundamental-based panic runs (Goldstein and Pauzner (2005)).** Bank fundamentals $$\theta$$ are stochastic. Three regions determine equilibrium behavior (p. 155): - $$\theta > \bar{\theta}$$: fundamentals are strong, no depositor has incentive to withdraw. - $$\theta \leq \underline{\theta}$$: the bank is insolvent; all depositors withdraw regardless of others' actions (a "fundamental run"). - $$\underline{\theta} < \theta \leq \theta^*$$: a panic region in which a coordinated run can cause failure even though absent the run the bank could pay all creditors. This model predicts that failures with runs occur randomly within the panic region and should therefore be harder to predict from fundamentals than failures outside it. The paper tests this implication and finds it is rejected. **The insolvency condition (Section VIII.B, p. 190).** The paper develops a simple framework to gauge what fraction of failed banks were fundamentally insolvent absent a run. A bank with book assets $$A$$, debt $$D$$, unrealized asset losses $$\lambda$$ before failure, and additional receivership losses $$\rho$$ has observed recovery rate $$R = (1-\lambda)(1-\rho)$$. Let $$v$$ be the franchise value as a share of current book assets. The bank is fundamentally insolvent irrespective of any run if: $$ (1-\lambda)(1+v)A < D $$ Rewriting in terms of leverage $$\ell = D/A$$ and the observed recovery rate: $$ \frac{1+v}{1-\rho} < \frac{\ell}{R} \tag{3} $$ A bank satisfying this condition was insolvent even if the run had not occurred. When $$\rho$$ and $$v$$ are low (baseline: both zero), the condition simplifies to $$R < \ell$$, which holds for 81% of pre-FDIC bank failures in the sample. ## Method **Measures of bank fundamentals (Section IV.A, pp. 161-162).** Three observable proxies for financial health are constructed: - *Insolvency risk.* Pre-1934: surplus profit relative to total equity (surplus profit = sum of surplus fund and undivided profits; proxies profitability and capitalization). Post-1959: net income / total assets. - *Noncore funding.* Pre-1934: total assets net of total deposits, equity, and national bank notes, all scaled by assets (captures expensive nondeposit wholesale funding). Post-1959: (time deposits + wholesale funding) / total assets. - *Asset growth.* Change in log real bank assets, used in quintile buckets to capture the nonlinear boom-bust relation. **Failure prediction model (Section V, p. 170, eq. 2).** Bank failures are predicted via linear probability models (with logit as robustness): $$ \text{Failure}_{b,t+1\to t+h} = \alpha + \beta_1\,\text{Insolvency}_{bt} + \beta_2\,\text{Noncore Funding}_{bt} + \beta_3\,\text{Insolvency}_{bt}\times\text{Noncore Funding}_{bt} $$ $$ + \beta_4\,\text{Asset Growth}_{bt} + \beta_5\,\text{Aggregate Conditions}_t + \epsilon_{b,t+1\to t+h} \tag{2} $$ where $$\text{Failure}_{b,t+1\to t+h}$$ is an indicator equal to one if bank $$b$$ fails within $$h$$ years of call report date $$t$$. Only real-time observables enter; no bank or time fixed effects are included. Predictive performance is evaluated via the area under the receiver operating characteristic curve (AUC), computed both in-sample and pseudo-out-of-sample using an expanding training window (first 10 years of data as initial training sample). **Aggregate failure rate prediction (Section VII, p. 184).** The bank-level predicted probabilities are aggregated into a predicted aggregate failure rate: $$ \bar{p}_{t|t-1} = \sum_{b \in B_{t-1}} w_{bt-1}\,\hat{p}_{b,t|t-1} $$ and regressed on the realized failure rate: $$ \text{FailureRate}_t = \alpha + \beta\,\bar{p}_{t|t-1} + u_t $$ using Newey-West standard errors (truncation parameter $$S = 1.3T^{1/2}$$). **Event-study dynamics (Section IV.B, p. 163, eq. 1).** To characterize how fundamentals evolve in failing banks, the paper estimates: $$ y_{b,t} = \alpha_b + \sum_{j=-9}^{0} \beta_j \times \mathbf{1}[\text{YearsToFail}_{b,t} = j] + \epsilon_{b,t} \tag{1} $$ restricted to failing banks within 10 years of failure; the omitted period is $$j = -10$$. Coefficients $$\{\beta_j\}$$ trace the pre-failure dynamics of solvency, funding, and assets. ## Empirical specifications **Predictability of bank failures (Section V.B, pp. 170-174).** Equation (2) is estimated separately for the historical pre-FDIC sample (1863-1934) and the modern sample (1959-2024) at one-, three-, and five-year horizons. Standard errors are not clustered (real-time observable specification; no fixed effects). The in-sample AUC for the full specification (insolvency, noncore funding, their interaction, asset growth quintiles, and aggregate conditions) ranges from 0.864 to 0.739 across horizons in the historical sample and from 0.953 to 0.831 in the modern sample (Table I, p. 172). The pseudo-OOS performance is nearly as strong, with OOS AUC = 0.851 (historical, 1-year) and 0.945 (modern, 1-year). **Failures with bank runs (Section VI.B, pp. 178-181).** Failures with large deposit outflows are defined as those where deposits decline by more than 7.5% between the last call report and failure (data available for 1880-1934 historically; 1993-2024 for the modern sample). Equation (2) is re-estimated restricting to this subsample. The AUC for failures with large deposit outflows is 0.855 (in-sample, historical, col. 5 vs. 0.864 for all failures in col. 4, Table I), confirming that fundamentals predict run-failures equally well. On average, banks in the historical pre-FDIC sample saw deposits decline by 14% before failure (Table II, Panel A), with 25% experiencing outflows exceeding 20%. Post-FDIC, average outflows are only 2.5%. **Aggregate waves of bank failures (Section VII, pp. 182-185).** The predicted aggregate failure rate $$\bar{p}_{t|t-1}$$ is constructed pseudo-out-of-sample using only data up to year $$t-1$$. Regressing the actual aggregate failure rate on $$\bar{p}_{t|t-1}$$ yields $$R^2 = 0.40$$ for the full sample and $$R^2 = 0.81$$ for the modern era 1970-2024 (Table III, p. 184). The estimated coefficient $$\hat\beta$$ is close to one in the modern era, indicating that predicted and actual failure rates move in proportion. The Great Depression years (1929-1934) are underpredicted, consistent with excess failures beyond what deteriorating micro-level fundamentals alone forecast. **Recovery rates and fundamental insolvency (Section VIII, pp. 185-194).** Recovery rate $$R$$ is defined as total cash collected by the OCC receiver divided by book assets at suspension. Regressing realized $$R$$ on OCC asset-quality categories (good, doubtful, worthless) yields coefficients of 0.89, 0.54, and 0.08 respectively, with $$R^2 = 0.936$$ (Table VI, col. 1, p. 189), validating the OCC assessments. The insolvency condition (equation 3) is applied bank by bank using observed $$\ell$$ and $$R$$ for a grid of $$(\rho, v)$$ values. Under the baseline ($$\rho = v = 0$$), 81% of pre-FDIC failures satisfy the insolvency condition (Table VII, p. 193). Even under the generous assumption that receiverships destroy 10% of asset value and franchise value equals 5% of assets ($$\rho = 0.1$$, $$v = 0.05$$), 60% of failures were insolvent. ## Datasets used | Dataset | Role in paper | Wiki page | |---------|--------------|-----------| | OCC Annual Reports to Congress (1863-1941) | Historical bank balance sheets (assets, loans, deposits, equity), failure events, causes of failure, receiver postmortem reports (deposits and assets at suspension, funds collected); digitized via OCR using methods of Correia and Luck (2023) | no page yet | | FFIEC Call Reports via Federal Reserve (1959-2024) | Modern quarterly bank balance sheets (FFIEC 031/041/051 from 1976; FFIEC 010/011 extended back to 1959); income statements; foundation of the modern-sample analysis | no page yet | | FDIC Failure Transaction Database (1934-2024) | Failure dates, deposits and assets at resolution for post-FDIC failures (1993-2024 subset used for deposit outflows); defines bank failure as closure involving purchase-and-assumption or liquidating receivership | no page yet | | National Information Center (NIC) tables | Bank charter and founding dates for de novo bank identification | no page yet | **Sample scope.** Historical sample: 14,152 national banks, 1863-1941 (annual; national bank notes era and early Fed era). Modern sample: 23,209 FDIC member banks, 1959-2024 (annual data used for comparability). Combined: 37,361 unique bank entities; 5,120 bank failures (2,887 pre-1935; 2,233 post-1959). Recovery rate analysis: 2,917 receiverships with complete data, 1863-1934. ## When to read the full paper - **Banking history and crises**: Section IV documents the fundamental dynamics in failing banks (Figures II-IV); Section VII shows these dynamics forecast systemic crises including the Great Depression and 2008 (Figure VII, Table III). - **Bank runs and solvency**: Sections VI and VIII contain the main tests of whether runs caused failures (Table I col. 5; Table VII); the framework in Section VIII.B (equation 3) is the cleanest tool for the fundamental insolvency calculation. - **Early warning / stress testing**: Table I provides benchmark AUC statistics (0.86-0.95) for bank failure prediction from simple accounting ratios; the full regression coefficients are in Online Appendix Tables B.4 and B.5. - **Historical database users**: Section III and Online Appendix C describe the OCR digitization of OCC Annual Reports and the construction of the new 1863-1941 balance-sheet panel; replication data are on Harvard Dataverse (Correia, Luck, and Verner 2025a). ## Attribution and rights This paper is in the public domain in the United States. The PDF footer (p. 204) states: "Published by Oxford University Press on behalf of President and Fellows of Harvard College 2025. This work is written by (a) US Government employee(s) and is in the public domain in the US." LLM-distilled summary, not human-verified, not reproduced. For the canonical text see: > Correia, Sergio, Stephan Luck, and Emil Verner. "Failing Banks." > *The Quarterly Journal of Economics* 141(1), 2026, 147-204. > https://doi.org/10.1093/qje/qjaf044 Replication data: Correia, Luck, and Verner (2025a), Harvard Dataverse, https://doi.org/10.7910/DVN/Q22XR1.