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.