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IN A FULL-EMPLOYMENT economy a firm's bankruptcy is prima facie evidence of resource misallocation. This is not to say, however, that the authorities should adopt every policy which minimizes bankruptcy. Fostering monopolies to reduce failures, for example, only increases the misallocation of resources.
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A Catastrophe Model of Bank Failure
The Journal of Finance, 1980ABSTRACTMost models of bank failure have assumed that the path towards bankruptcy or insolvency is smooth and continuous. As a consequence a number of early‐warning systems have been suggested in the banking and financial literature to aid regulators in the identification of potential problem banks.
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