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represent the nature of bank deterioration. Indeed, the few observations that we have of recent bank failures provide evidence consistent with this hypothesis. The changes in the banking environment call for renewed research into the causes of bank distress. The federal supervisory agencies have established research programs pursuing this goal, but-because regulatory banking economists often work on projects with confidential data and because many ongoing projects are not formally disclosed to the public-it can be difficult for outside economists to benefit from this work. By describing some efforts that are currently underway to develop new early-warning models at the Federal Reserve and Federal Deposit Insurance Corporation (FDIC), we attempt to bridge that gap in the hope of stimulating more research in this area beyond that done by government agencies. One strand of the new monitoring devices attempts U nderstanding the causes of insolvency at financial institutions is important for both academic and regulatory reasons, and the effort to model bank deterioration was once a vibrant area of study in empirical finance. Significant advances were made between the late 1960s and late 1980s. Since then, research has slowed considerably on the characteristics of banks headed for trouble, reflecting a sense among researchers that the causes of banking problems are unchanging and well understood. In this article, we argue that this complacency may be unwarranted. 1 The rapid pace of technological and institutional change in the banking sector in recent years suggests that the dominant models may no longer accurately Since 1990, the banking sector has experienced enormous legislative, technological, and financial changes, yet research into the causes of bank distress has slowed. One consequence is that traditional supervisory surveillance models may not capture important risks inherent in the current banking environment. After reviewing the history of these models, the authors provide empirical evidence that the characteristics of failing banks have changed in the past ten years and argue that the time is right for new research that employs new empirical techniques. In particular, dynamic models that use forward-looking variables and address various types of bank risk individually are promising lines of inquiry. Supervisory agencies have begun to move in these directions, and the authors describe several examples of this new generation of early-warning models that are not yet widely known among academic banking economists.

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