Do Distressed Banks Really Gamble for Resurrection?

Itzhak Ben-David, Ajay Palvia and René Stulz

No 25794, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G11 G21 G33 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-rmg
Note: CF
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Citations: View citations in EconPapers (9)

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