The role of the term structure of interest rates in bank-failure-prediction models.

Aspects of the relationship between the term structure of interest rates and bank failure from 1984 to 1989 are explored in the context of a bank-failure-prediction model. For this, the logit technique is employed. Interest rate variables used to characterize the term structure include Treasury, Federal-funds, and bank-certificate-of-deposit rates. The term structure proves a significant factor in determining the probability of bank failure. Changes in long-term rates relative to short-term rates can profoundly affect bank performance. These findings corroborate any measures being taken by banks or regulators to minimize banks' interest rate risk exposure.