Lessons from New England Bank Failures
The rapid deterioration in the condition of New England banks during the late 1980s, following a period of robust growth and prosperity in the region, provides valuable lessons relevant to efforts to protect the banking system from future shocks. This article demonstrates the timing of events leading to the failure of 87 New England banks. It emphasizes the development of abnormal risk concentrations, an eventual change in the economic and psychological underpinnings of these risks, and the rapid transition from apparently healthy banks to failure.
The author finds that most bankers ceased aggressive risk-taking at the first sign of emerging credit problems, and that bank supervisors generally reacted promptly as credit weaknesses emerged but did not act against the earlier risk concentrations. Furthermore, capital ratios did not deteriorate until some time after credit problems emerged.