Bailouts and the Modeling of Bank Distress

Koresh Galil, Margalit Samuel , Shapir Offer, Wolf Wagner

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In this article, we develop a model for predicting distress events among large banks. We show that a bailout possibility induces different behaviors among small and large banks, and the proposed failure prediction model for large banks is thus considerably different from that for small banks. Major bank-level fundamentals show opposite conjecture directions for large versus small banks. The Tier 1 capital ratio, which is under the scrutiny of regulators and investors, has almost no distress prediction power among large banks. However, banks rescued by governments tend to maintain a lower Tier 1 ratio. The cost of funding in large banks is negatively correlated with the probability of failure, reflecting the fact that lenders internalize the too-big-to-fail (TBTF) policy and demand a lower interest rate from TBTF banks.
Original languageEnglish
JournalJournal of Financial Research
DOIs
Publication statusPublished - 2022

Bibliographical note

Publisher Copyright:
© 2022 The Southern Finance Association and the Southwestern Finance Association.

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