Working Paper: NBER ID: w23654
Authors: Emilia Bonaccorsi di Patti; Anil Kashyap
Abstract: We analyze the fate of 110 Italian banks that experienced abrupt drops in profitability, from which about 1/3 recover. Recovery depends primarily on post-shock adjustments made by the banks, particularly to their loan portfolios. Matched bank-borrower data shows that recovering banks are significantly more aggressive in managing their riskiest clients. The risk management differences are consistent with some banks cutting credit to very riskiest clients while others appear to be gambling for reclamation by continuing to extend credit to high risk borrowers.
Keywords: bank recovery; profitability shocks; risk management; Italian banks
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| post-shock adjustments made by banks (G21) | recovery (P21) |
| aggressive management of riskiest clients (G11) | recovery outcomes (I12) |
| cutting credit to riskier borrowers (G21) | recovery (P21) |
| poor risk management (H12) | failure to recover (G33) |
| reducing idiosyncratic risk (G39) | recovery probabilities (C59) |