Economic Cycles and Bank Health

Over the past two decades the United States has experienced substantial increases in the number of bank failures, however, surprisingly few banks have failed during the 2001 recession. This paper explores the relationship between economic cycles and bank health. We find that economic forecasts provide little additional information over bank-specific financial data during prosperous times, possibly because bank problems during these times are likely to be idiosyncratic to individual management decisions. However, economic forecasts become relevant during troubled economic periods, with poor economic conditions hindering a broader set of institutions. *Federal Reserve Bank of Boston. The authors would like to thank David Schramm for valuable research assistance. We thank Mark Vaughan and seminar participants of the Federal Reserve Bank Structure Conference for helpful comments.