Why do contagion effects vary among bank failures?

Many of the previous studies on contagion effects in the banking industry f ocused on the failure of a large bank to determine whether the adverse effe cts spread to other banks. Yet. little is known whether other publicized ba nk failures cause contagion effects, and why the effects may vary among ban k failures. Given the changes in the banking environment over time, contagi on effects could be conditioned on the characteristics of the failing bank and of the banking environment at that time. We assess 99 publicized bank f ailures over the 1980-1996 period, and find that contagion effects exist in general for the surviving rivals of the failed bank. The degree of contagi on effects varies over time (among bank failures), and is stronger when the failed bank is a multibank holding company, when the failed bank is public ly held, when the failed bank is relatively large, when the rivals are rela tively small, and when the rivals have relatively low capital levels. The c ontagion effects are less pronounced in the period following the passage of FIRREA. Furthermore, the total risk-shifts of surviving rival banks in res ponse to the announcement of a failed bank are inversely related to their c apital level, and total risk-shifts of rival banks are less pronounced for Failures occurring just after the passage of FIRREA. The results suggest th at a bank's exposure to possible contagion effects due to a bank failure ca n be partially controlled by a bank's managerial policies and by regulatory policies. (C) 2001 Elsevier Science B.V. All rights reserved.