Do bank failures still matter in affecting regional economic activity?

Using a panel dataset covering all 50 states and the District of Columbia for 1984-2014, this study examines the consequences of commercial bank failures on the regional economy. Employing both single-equation panel estimations as well as panel VAR models, I find credit crunch and bank-business relationship channels to be operative at the state-level. Although the deleterious effect of bank failures is found on different measures of regional economic activity including industry-specific labor and goods markets, it is most pronounced on construction-sector employment and GDP growth rates. The findings imply when credit flows are disrupted, potential borrowers like construction companies and building contractors may not be able to secure funds to undertake investment activities, leading to a decline in employment and output growth. The results call for constant monitoring of banks by banking regulatory authorities and identifying early warning signals of bank failures to mitigate their potential real sector losses.