Model Specification for Bank Failure: A Retrospective Look at Banks in Missouri during the Great Depression

This paper examines banks in Missouri during the Great Depression in order to find the correct model specification for bank failure during economic downturns. The data set controls for a bank’s balance sheet, correspondent network, charters and memberships, county characteristics, and market share, and includes both Federal Reserve member and non-member banks. Using a probit model, it is concluded that the contractionary monetary policy employed by the St. Louis Federal Reserve did not help bank survival, as being a member of the Federal Reserve had no significant effect on a bank’s probability of survival. Additionally, while an increased network led to higher rates of bank survival, connections to Chicago show evidence of contagion risk. Finally, the paper concludes that for future model specification it is important to capture balance sheet, network, and environment characteristics, as leaving out certain information can lead to omitted variable bias