Working Paper: NBER ID: w25794
Authors: Itzhak Bendavid; Ajay A. Palvia; Ren M. Stulz
Abstract: We explore the actions of financially distressed banks in two distinct periods that include financial crises (1985-1994, 2005-2014) and differ in bank regulations, especially concerning capital requirements and enforcement. In contrast to the widespread belief that distressed banks gamble for resurrection, we document that distressed banks take actions to reduce leverage and risk, such as reducing asset and loan growth, issuing equity, decreasing dividends, and lowering deposit rates. Despite large differences in regulation between periods, the extent of deleveraging is similar, suggesting that economic forces beyond formal regulations incentivize bank managers to deleverage when their banks are in distress.
Keywords: Distressed Banks; Gambling for Resurrection; Deleveraging; Financial Crises
JEL Codes: G11; G21; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distressed banks (G21) | deleveraging behaviors (G40) |
| distressed banks (G21) | increase in equity capital ratios (G32) |
| distressed banks (G21) | reduce asset bases (G32) |
| distressed banks (G21) | cut dividends (G35) |
| distressed banks (G21) | lower deposit rates (E43) |
| distressed banks (G21) | improve risk indicators (C43) |
| regulatory environment (G38) | banks' responses to distress (G21) |
| TARP (E63) | banks' recapitalization efforts (G28) |