The Weakest Link: Sibling Dynamics and Bank Failures in Multi-Bank Holding Companies

This paper examines bank failures during the subprime mortgage crisis, emphasizing sibling dynamics within multi-bank holding companies (MBHCs). While traditional risk indicators effectively predict failures for one bank holding companies (OBHCs), they exhibit limited explanatory power for MBHCs, where internal capital markets and interdependencies across affiliates shape risk outcomes. We extend the standard failure framework by incorporating group-level characteristics that capture sibling network structure and the distribution of risk across affiliates. Using pre-crisis data from 2006 to 2007, we show that group structure significantly influences failure risk. Larger sibling networks reduce individual bank failure risk through diversification, while greater size dispersion across affiliates increases vulnerability by constraining internal resource allocation. Beyond these aggregate effects, we introduce a weakest link approach that identifies the most distressed affiliate based on extreme tail risk in capitalization, asset quality, liquidity, earnings, and income volatility, capturing organizational fragility that aggregate measures miss. Concentrated vulnerabilities at a single affiliate significantly amplify failure risk throughout the holding company, even after controlling for traditional bank-level fundamentals and parent-level characteristics. These findings, derived from the 2007–2010 crisis, a severe stress test of holding company structures, identify organizational dynamics: resource competition among siblings and concentrated vulnerabilities at the weakest affiliate. Supervisory frameworks should explicitly account for within-group interdependencies rather than relying solely on individual bank metrics or aggregate indicators when monitoring bank holding company structures.