Start-up banks� default and the role of capital

Massimo Libertucci () and Francesco Piersante ()
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Francesco Piersante: Bank of Italy

No 890, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Regulation requires banks to hold a minimum capital endowment upon their establishment. But what role does initial capital play in a bank�s lifecycle? This paper addresses the issue for start-up banks. We use both survival-time and binary choice models for a sample of newly-established Italian banks in the period 1994-2006, controlling for a broad set of possible drivers of default, such as market, managerial and financial variables. Our results suggest that initial capital does play a leading role in explaining both the timing and the likelihood of a failure. Other important drivers are organisation and a balanced growth path, while market and management variables appear to play a minor role. We then turn to a quasi-experimental design: exploiting a regulatory shift in 1999 we run a counterfactual analysis of the impact of a regulatory tightening of initial capital, which affected only a subsample of banks. The set of results suggests that the effect on banks� survival may be significant.

Keywords: bank capital; survival analysis; probability of default analysis; start-up banks; counterfactual analysis (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_890_12

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