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

Jean-Michel Sahut and Mehdi Mili

Economic Modelling, 2011, vol. 28, issue 1, 138-146

Abstract: This paper studies banking distress in MENA countries and considers the extent to which mergers are used as a solution for resolving individual banking distress. We use a two-level nested logit model to model the interdependence between merger decisions and the distressed state of banks. Both bank-specific variables and macroeconomic 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 more significant determinants of banking distress than macroeconomic variables. A comparison of model fits and out-of-sample forecasts indicates that the unordered NL model statistically outperforms a standard logit model by substantial margins. Our empirical study shows that 67% of the distressed banks in our sample are involved in merger transactions and that weak financial status systematically increases the likelihood of a bank being involved in a merger. Distressed state-owned banks are less likely to be a target of a merger transaction. However, global economic conditions do not significantly affect the decision of distressed banks to initiate a merger policy.

Keywords: Nested logit; Banking distress; Bank mergers; CAMEL rating; Financial stability (search for similar items in EconPapers)
JEL-codes: G21 G33 G35 G38 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:1:p:138-146

DOI: 10.1016/j.econmod.2010.09.017

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