Journal of Applied Finance & Banking

Did Aggressive Business Growth Strategies Lead to Bank Failures? Lessons from the Late 2000s Great Recession

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• Abstract

  This article traces back to pre-2007 conditions to scrutinize operating strategies and decisions of banks that either survived through or failed during the last recession.  Using the sustainable growth paradigm, this analysis isolates components of operating strategies under either an aggressive or a conservative growth stance to shed light on the type of business decisions that eventually led to either survival or failure when economic conditions became highly volatile. The distinction between the surviving and failed banks’ growth decisions becomes more apparent in their profitability, earnings retention, and financial leverage decisions. Results indicate that surviving banks’ conservative and regulated growth decisions led to higher profit margins and more earnings retained. For these banks, faster growth aspirations require sourcing of cheaper external funds, instead of relying on equity funds with higher transaction costs. Smaller banks need to accumulate adequate financial strength and capability before considering aggressive growth strategies.

  
  

  JEL classification numbers: G21, O40, M21

  Keywords: Recession, Bank failure, Sustainable growth, Growth levers.