The regional distribution of bank closings in the United States from 1982 to 1988: a brief note.

• Author: Loucks, Christine
• Position: Communications

1. Introduction

   In an earlier article in this Journal, Amos [1] presents a cross-section analysis to explain the regional distribution of bank closures. While he presents a strong case for the importance of regional economic factors and state branching regulations in explaining the percentage of bank failures from 1982-88, Amos finds statistical significance for only a few of the independent variables in his model. I believe that Amos's inability to find statistical significance is caused by the regression technique that he employs. Amos uses ordinary least squares (OLS) to estimate the percentage of bank failures. However, ten states experienced no bank failures from 1982-88. Thus, there is a significant number of observations where the dependent variable is truncated at zero. The appropriate estimation technique for a distribution with this characteristic is Tobit [2, 682-690]. The purpose of this comment is to reestimate Amos's model using the correct estimation technique, Tobit, as well as to correct the estimates for heteroscedasticity.

2. Model and Regression Results

   Based on his analysis of the historical trend in bank closings from 1934 to 1988, Amos argues that the level of production activity within a state, as measured by gross state product, will affect the number of bank closures. He hypothesizes that healthy state economies will have a lower level of bank closures. Thus, he predicts a negative relationship between the percentage of bank closures and gross state product. Amos also argues that regional economic factors affect the percentage of bank closures. He observes that two of the nine census regions, West South Central and West North Central, contain over half of the bank closings from 1982-88. However, the New England, Mid-Atlantic, and South Atlantic regions had less than five percent of the total bank closures during this period. In the remaining regions, East North Central, East South Central, Mountain, and West, the majority of the bank closures were concentrated in one or two states within each region. Amos attributes this regional variation in the distribution of bank closures to the differences in the core economic activity in each region. He observes that the ten states with the highest shares of gross state product from oil and gas extraction have fifty-four percent of the bank closures, that the top ten farming states have twenty-two percent of the bank closures, and that the top ten states with the greatest...