Of all 557 commercial bank failures since 2000, only 28 banks failed on a day other than Friday, according to a Federal Reserve Bank of New York staff report published November 2. The research reveals that modern bank failures are rarely triggered by market forces like deposit withdrawals but instead follow deliberate supervisory decisions, with regulators typically arranging for another bank to purchase the failing institution before closure formally occurs. The pattern stands in sharp contrast to the pre-deposit insurance era, when failures were evenly distributed across weekdays and depositors or bank owners determined when institutions closed.
The report analyzed supervisory data covering all commercial bank examinations from 2000 to 2023 to understand how banking supervision identifies and disciplines troubled institutions. Researchers found that the probability of bank closure is tightly linked to a bank's reported equity-to-assets ratio. Banks with an equity-to-assets ratio above 5 percent effectively never fail, while those below that threshold face rapidly increasing closure risk. When the ratio drops below 2 percent, the likelihood of failure within the next year jumps to nearly 70 percent. The research also showed that CAMELS ratings—which assess bank health across six criteria—closely track hard financial information for poorly capitalized banks. Institutions with an equity-to-assets ratio below 4 percent almost always receive a rating of 4 or 5, indicating deficient or critically deficient status, with average ratings exceeding 4.
The authors document that supervisors actively shape the financial information that appears in banks' public statements through on-site examinations. The probability of revising a previously submitted call report shoots up sharply during the month of an examination and the two months immediately following it, according to the research. For failing banks, the cumulative effect is substantial: in the five years before failure, a typical bank experiences an 8 percentage point decline in its equity-to-assets ratio, with revisions accounting for nearly 3 percentage points of that drop. The report concludes that "a considerable part of the decline in the equity-to-assets ratio in failing banks occurs after revisions of their original call report submissions."
The research highlights a fundamental tension in banking supervision: stricter oversight can cut the costs of resolving failed banks and prevent "gambling for resurrection" that increases eventual losses, but it also forces loss recognition that can choke off credit supply during already weak economic conditions. The report examined a natural experiment during the 2008 financial crisis where similar banks were quasi-randomly assigned strict supervisors and found that tougher supervision caused banks to recognize more losses and report lower book equity, increasing the likelihood of failure while reducing credit availability in the short term. The authors note that forbearance—allowing troubled banks more time to recover—may preserve credit supply and enable institutions to rebound if asset values improve, especially important given that deposit insurance has weakened market discipline from depositors. The report makes clear it doesn't draw conclusions about what level of supervisory strictness is optimal, focusing instead on documenting the trade-offs regulators face when deciding whether to force troubled banks to recognize losses or give them breathing room to survive.