Determinants of Bank Distress in Europe: Evidence from a New Data Set

Abstract

Using a unique data set on bank distress, this paper provides novel empirical evidence on the determinants of bank soundness in the European Union (EU) as a whole. The estimation results are consistent with the hypothesis that bank risks have converged across EU members, providing empirical support for introduction of a more centralized system of financial regulation in the EU. We show that asset quality and earning profile of banks are important determinants of bank distress next to leverage, suggesting that these should be central in EUwide financial regulation and supervision. We find that market discipline, both by depositors and by stock market participants, plays a role in the EU, supporting the notion that transparency and dissemination of financial information would contribute to the financial soundness of banks. Our data also point to the presence of contagion effects, relatively higher fragility of concentrated banking sectors, and hazards associated with high ratios of wholesale funding.

Sovereign and bank CDS spreads: Two sides of the same coin?

“…The early signals of a banking crisis could be obtained by observing sovereign credit spreads and this information could be used to take more timely policy actions in order to prevent a country-specific banking crisis from becoming systemic and affecting the whole European banking sector. Given the convergence of bank risks across Europe documented by Poghosyan and Čihak (2011), our findings also suggest that policymakers should adopt coordinated actions, especially in crisis periods when European banking sectors are similarly affected by negative shocks. With regard to that, recent proposals for the establishment of a banking union (Goyal et al, 2013) could help speed up the decision process at times when timely decisions are much needed.…”

To be bailed out or to be left to fail? A dynamic competing risks hazard analysis

“…More recently, Poghosyan and Cihak (2011) rely on a logistic regression analysis to examine bank distress in 25 EU countries. In the same modelling environment, DeYoung and Torna (2013) show the importance of non-interest income activities, such as securities brokerage, investment products and asset securitisation to the failure likelihood of U.S. banks in the 2007-8 crisis, whereas Distinguin et al (2013) use a sample of major listed banks from eight East Asian economies to show that both accounting and market measures are effective indicators of bank failures.…”

“…Gonzalez-Hermosillo et al (1997) also refer to the occurrence of bank intervention in the form of financial assistance, such as recapitalisation, to define failure broadly. The definition of distress in Poghosyan and Cihak (2011) relies on one of the following keywords: rescue, bailout, financial support, liquidity support, government guarantee, and distressed merger. The study of Mare (2015) defines a bank in default as one entering into special administration (i.e., conservatorship) under which the distressed bank remains alive as a going-concern entity, or compulsory liquidation which is a gone-concern action.…”

“…In the same vein, Arena (2008) provides evidence that the merged and acquired banks share very similar characteristics with failed banks. Moreover, Poghosyan and Cihak (2011) define distressed mergers as forced mergers with healthier banks, while Mare (2015) treat mergers as a resolution mechanism of troubled banks. In this context, the studies of Lanine and Vennet (2006), Lu and Whidbee (2013), Fiordelisi and Mare (2013), and Berger et al (2016) exclude merged and acquired institutions from their empirical analyses.…”

Evaluating Performance of Commercial Banks in Pakistan: An Application of Camel Model

“…The Management has been empirically evaluated by non-interest expense to the sum of net interest income and non-interest income, personal expenses to average assets and cost to income ratio [107].…”