Working Paper: NBER ID: w17038
Authors: Rüdiger Fahlenbrach; Robert Prilmeier; René M. Stulz
Abstract: We investigate whether a bank's performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank's poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.
Keywords: Bank Performance; Financial Crisis; Crisis Prediction; Business Model Hypothesis; Learning Hypothesis
JEL Codes: G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor performance during the 1998 crisis (F65) | poor performance during the 2007-2008 financial crisis (F65) |
| percentage point loss in equity value during the 1998 crisis (G01) | annualized loss during the 2007-2008 financial crisis (G01) |
| lower return during the 1998 crisis (G01) | higher probability of failure during the 2007-2008 crisis (F65) |
| poor performance during the 1998 crisis (F65) | reliance on short-term funding (F65) |
| poor performance during the 1998 crisis (F65) | growth prior to the crises (N13) |