LESSONS FROM NEW-ENGLAND BANK FAILURES

The rapid deterioration in the condition of New England banks during t he late 1980s, following a period of robust growth and prosperity in t he region, provides valuable lessons relevant to efforts to protect th e banking system from future shocks. This article demonstrates the tim ing of events leading to the failure of 87 New England banks, It empha sizes the development of abnormal risk concentrations, an eventual cha nge in the economic and psychological underpinnings of these risks, an d the rapid transition from apparently healthy banks to failure. The a uthor finds that most bankers ceased aggressive risk-taking at the fir st sign of emerging credit problems, and that bank supervisors general ly reacted promptly as credit weaknesses emerged but did not act again st the earlier risk concentrations. Furthermore, capital ratios did no t deteriorate until some time after credit problems emerged.