The failure of new entrants in commercial banking markets: a split‐population duration analysis

Poghosyan²,

Kick³

2010

IMF Working Papers

Based on detailed regulatory intervention data among German banks during 1994-2008, we test if supervisory measures affect the likelihood and the timing of bank recovery. Severe regulatory measures increase both the likelihood of recovery and its duration while weak measures are insignificant. Results seem not to be driven by regulators directing measures to particularly bad banks. That is, our results remain intact when we exclude banks that eventually exit the market due to restructuring mergers or moratoria. More transparent publication requirements of public incorporation that indicate more exposure to market discipline are barely or not at all significant. Increasing earnings and cleaning credit portfolios are consistently of importance to increase recovery likelihood, whereas earnings growth accelerates the timing of recovery. Macroeconomic conditions also matter for bank recovery. Hence, concerted micro-and macro-prudential policies are key to facilitate distressed bank recovery.Key words: bank distress, capital support, regulation, recovery JEL: G28, C41, G21 Non-technical summaryBetween 1994 and 2008, German universal banks received in 473 cases capital support measures from sectoral insurance schemes. We identify the determinants of recovery probabilities, defined as repayment of capital injections, and the duration capital support spells. Our focus is on the effects of regulatory actions and we test two hypotheses pertaining to recovery probabilities and duration, respectively.We use a split-population duration model to simultaneously estimate the likelihood and the duration until recovery and control for bank-specific and (regional) macroeconomic factors. We also specify different regulatory measures administered to re-capitalized banks, the occurrence of non-scheduled supervisory audits, and an indicator for public limited incorporation as a proxy for market-based governance due to more frequent and detailed publication requirements associated with these incorporation choices.The results support the "regulatory insider hypothesis". Severe measures (e.g. the prohibition to distribute profits) based on the regulator's inside knowledge about the true state of the bank due to, for example, on-and off-site monitoring and compulsory reporting by banks, increase the likelihood of recovery. The duration of capital support spells, in turn, is increased by severe measures. Unscheduled audits have the same effect while leaving recovery probabilities unaffected. This supports the so-called "sustainability hypothesis", which conjectures that regulators prefer diligent and sustainable restructuring efforts over fast but potentially shortsighted repayment of capital support schemes. For both hypotheses we assume that the regulator's objective function is different from the goals defined by the bank management.Results seem not to be driven by regulators directing measures to particularly bad banks. With the benefit of hindsight we identify the most troubled banks as those that were forced to either merge wi...

Section: Methodsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Recovery Determinants of Distressed Banks: Regulators, Market Discipline, or the Environment?

Poghosyan²,

Kick³

2010

IMF Working Papers

“…In fact, only ve percent of all troubled banks in their sample were eventually closed. Other studies by Wheelock and Wilson (2000), Worthington (2002), DeYoung (2003) and that allow for multiple distress and/or exit events conrm that troubled banks do not face a dichotomous destiny limited to survival or failure only.…”

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confidence: 98%

Slippery Slopes of Stress: Ordered Failure Events in German Banking

Kick

2007

SSRN Journal

Outright bank failures without prior indication of nancial instability are very rare. Supervisory authorities monitor banks constantly. Thus, they usually obtain early warning signals that precede ultimate failure and, in fact, banks can be regarded as troubled to varying degrees before outright closure. But to our knowledge virtually all studies that predict bank failures neglect the ordinal nature of bank distress. Exploiting the distress database of the Deutsche Bundesbank we distinguish four dierent distress events that banks experience. Only the worst entails a bank to exit the market. Weaker orders of distress are, rst, compulsory notications of the authorities about potential problems, second, corrective actions such as warnings and hearings and, third, actions by banking pillar's insurance schemes. Since the four categories of hazard functions are not proportional, we specify a generalized ordered logit model to estimate the respective probabilities of distress simultaneously. Our model estimates each set of probabilities with high accuracy and conrms, rst, the necessity to account for dierent kinds of distress events and, second, the violation of the proportional odds assumption implicit in most limited dependent analyses of bank failure.Keywords: Bank, failure, distress, generalized ordered logit JEL: C35, G21, G33, K23, L50 Non-technical summary Bank insolvencies are dierent from failures of non-nancial rms because they may disrupt trust in the banking system as a whole. This explains why banks are subject to more regulatory scrutiny compared to most other industries. Supervisors therefore monitor banks on an ongoing basis to ensure the nancial safety and soundness of individual banks and the system. To this end, they use among other things o-site monitoring systems, which rely mostly on bank-specic nancial data reported to the authorities. These so-called hazard rate models predict the probability of default of individual banks on the basis of historical nancial and default data.Obviously, the denition of default is crucial to such analyses. On the one hand, banks are subject to clear-cut failure denitions, such as minimum capital requirements stipulated in laws and regulations. On the other hand, the systemic dangers of bank defaults in conjunction with an ongoing supervision process suggest that regulators, and practitioners, may regard a bank as troubled much earlier than ultimate default in the form of (forced) market exit occurs. We argue in this paper that most bank hazard studies neglect this ordinal nature of what we prefer to dene as distress rather than default.We address the issue by using data on a number of distress events that German universal banks from all three pillars experienced between 1994 and 2004. We categorize these events into four groups of ascending degrees of distress, ranging from early warning information issued by banks to regulators to absorbing events such as closure and restructuring mergers. To account for this pecking order of events, we specify a genera...

“…A number of studies on bank mergers (Worthington, 2004;Wheelock and Wilson, 2000;Cole and Gunther, 1995;DeYoung, 2003) find that larger banks are less likely to be taken over. To account for differences in size, we include the log of risk-weighted total assets, RW A, as a final bank characteristic.…”

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confidence: 99%

Accounting for distress in bank mergers

Journal of Banking & Finance

Bos

Heid

et al. 2007

The inability of most bank merger studies to control for hidden bailouts may lead to biased results. In this study, we employ a unique data set of approximately 1,000 mergers to analyze the determinants of bank mergers. We use data on the regulatory intervention history to distinguish between distressed and non-distressed mergers. We find that, among merging banks, distressed banks had the worst profiles and acquirers perform somewhat better than targets. However, both distressed and non-distressed mergers have worse CAMEL profiles than our control group. In fact, non-distressed mergers may be motivated by the desire to forestall serious future financial distress and prevent regulatory intervention.