On the Resolution of Banking Crises: Theory and Evidence

Hoggarth, Glenn; Reidhill, Jack; Sinclair, Peter

doi:10.2139/ssrn.641287

Cited by 62 publications

(48 citation statements)

References 20 publications

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“…The merger may therefore serve as a disciplinary device for the banks' management to improve the banks' performance or as a means of implementing unpleasant business measures. Hoggarth and Reidhill and Sinclair (2003) note that there is a range of options for resolving insolvent banks. At one extreme, a bank can be kept open through an injection of capital.…”

Section: Banking Distress and Mergermentioning

confidence: 99%

Banking distress in MENA countries and the role of mergers as a strategic policy to resolve distress

Sahut¹,

Mili

2011

Economic Modelling

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Abstract. This paper studies bank distress in MENA countries and addresses the question of whether mergers are commonly considered as a solution for resolving individual bank distress. Both specific bank levels and macro variables are deployed to predict banking distress. In line with other recent papers, we challenge the view that specific bank indicators such as CAMEL category and bank size are significant determinants of bank distress. Our findings indicate that monetary policy indicators do not really affect bank distress in MENA countries. Overall, we suggest that bank capitalization and regulatory supervision needs to be given enough consideration to avoid individual distress in the banking sector. Our empirical study shows that 67% of the distressed banks in our sample are involved in merger transactions and that poor financial status systematically increases the likelihood of a bank being involved in a merger. Distressed state-owned banks and large-sized banks are less likely to be a target in a merger transaction. However, global economic conditions do not affect the decision of distressed banks to initiate a merger policy.JEL: G21, G33, G35, G38.

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Section: Banking Distress and Mergermentioning

confidence: 99%

Banking distress in MENA countries and the role of mergers as a strategic policy to resolve distress

Sahut¹,

Mili

2011

Economic Modelling

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“…In practice, the number of options available to regulators for handling the bank insolvency problem decreases with the severity of the problem (Barth, Caprio, and Levine, 2006;Hoggarth, Reidhill and Sinclair, 2004). When faced with an individual bank with a minor problem, regulatory authorities typically seek to find a private sector solution.…”

Section: Introductionmentioning

confidence: 99%

“…When problems are severe for an individual bank, prudent regulation requires a change in bank status through nationalization, liquidation, acquisition, or the sale to a private entity. In times of crisis the government may be forced to intervene through nationalization to reduce disruption in the payments system (Hoggarth, Reidhill and Sinclair, 2004), or to prevent fire sale prices to foreign banks (Acharya and Yorulmazer, 2008), or both.…”

Section: Introductionmentioning

confidence: 99%

Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak

Brown¹,

Dinç²

2009

Rev. Financ. Stud.

308

148

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This paper studies bank failures in 21 emerging market countries in the 1990s.By using a competing risk hazard model for bank survival, we show that a government is less likely to take over or close a failing bank if the banking system is weak. This TooMany-to-Fail effect is robust to controlling for macroeconomic factors, financial crises, the Too-Big-To-Fail effect, domestic financial development, and concerns due to systemic risk and information spillovers. The paper also shows that the Too-Many-to-Fail effect is stronger for larger banks and when there is a large government budget deficit.1

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“…In sum, we suggest that future hazard rate studies should attempt to model dierent degrees of distress more explicitly. Monitoring and promoting the stability and soundness of banking systems is one of the major concerns of international policy makers (see for example the Bank for International Settlements (1999;2004), the European Central Bank (2005), the International Monetary Fund (Caprio and Klingebiel, 1996;Dell'Ariccia et al, 2005), the Bank of England (Hoggarth et al, 2004), Deutsche Bundesbank (2005) or the Federal Deposit Insurance Scheme (King et al, 2005)). Beginning with the work of Sinkey (1975), Martin (1977) and Altman (1977) on failures of U.S. banks numerous studies therefore seek to predict probabilities of bank default on the basis of nancial data.…”

mentioning

confidence: 99%

Slippery Slopes of Stress: Ordered Failure Events in German Banking

Kick

Koetter

2007

SSRN Journal

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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...

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On the Resolution of Banking Crises: Theory and Evidence

Cited by 62 publications

References 20 publications

Banking distress in MENA countries and the role of mergers as a strategic policy to resolve distress

Banking distress in MENA countries and the role of mergers as a strategic policy to resolve distress

Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak

Slippery Slopes of Stress: Ordered Failure Events in German Banking

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