Bank Distress Research Articles

The real effects of distressed bank mergers

We show that distressed bank mergers that are a widely used instrument for bank resolution have the potential to generate adverse real economic effects. We analyze distressed mergers of German savings banks and show that they represent exogenous shocks to the (initially non-distressed) acquiring bank. In the years after a distressed merger: (i) the performance of the acquiring savings bank deteriorates; (ii) the shock is transmitted to firms in the acquirer’s region which cut back their investments and reduce employment and (iii) the overall macroeconomic dynamics in the region of the acquirer deteriorates, leading to reductions in investment and employment growth. To support a causal interpretation of our results we perform several tests that confirm that local economic dynamics is affected by the shock to the acquiring bank and not by real economic contagion.

Determinant of Financial Distress in Conventional Rural Banks in Central Java: Before and during Covid-19 Period

Determinant of Financial Distress in Conventional Rural Banks in Central Java: Before and during Covid-19 Period

Can We Predict the Financial Distress of Banks in Sub-Saharan Africa?

Can We Predict the Financial Distress of Banks in Sub-Saharan Africa?

Analysis Prediction of Financial Distress in Islamic Commercial Banks in Southeast Asia Using the Springate S-Score Method

Financial distress is a condition of financial difficulties before entering the bankruptcy stage, so bankruptcy itself is the impact of financial distress, and the company can no longer be saved. The chaotic economy caused by the COVID-19 pandemic had a negative impact on various sectors, especially Islamic banking institutions, which experienced a decline in financial performance and even experienced financial distress. The purpose of this study is to analyze the prediction of financial distress in Islamic Commercial Banks in Southeast Asia using the Springate S-Score method, as well as to see and determine differences in the level of financial distress in each Islamic Commercial Bank that is used as the research sample. The research method used in this research is quantitative, and the research design used is descriptive and comparative. This study used a purposive sampling technique with a sample of 4 Islamic Commercial Banks in Southeast Asia with a 5 year research period. The data analysis applied descriptive analysis techniques, the Springate S-Score method, and the ANOVA Test. The results of this study indicate that each Islamic commercial bank used as a sample is categorized as distressed based on Springate calculations for the 2017-2021 period, and there are differences in financial distress conditions at each bank.

Can Text-Based Statistical Models Reveal Impending Banking Crises?

AbstractThis paper introduces statistical models Wordscores and Wordfish to study and predict banking crises. While Wordscores is akin to supervised learning, Wordfish is analogous to unsupervised learning. Both methods estimate the position of banking distress on a tranquil-to-crisis spectrum. Findings suggest that the two statistical methods signal banking crisis up to two-years in advance, with robust results from AUROC, Granger causality and VAR impulse responses. Both methods outperform random forests in predicting crises using textual data. The Wordscores index highlights increased usage of banking sector nomenclature two years preceding a crisis, and Granger causes a crisis series with one and two lag lengths. Results from the Wordfish technique, a statistical model with Poisson distribution, show the index spikes before and during the Global Financial Crisis, when a large share of the countries in the world encountered banking crises. This paper contributes to literature on text-based models of banking crises by bolstering the preemptive policy responses available to policy makers. Given their early warning signals, both Wordscores and Wordfish can be considered a part of the toolset to monitor the stability and resilience of the banking sector.

Predicting corporate restructuring and financial distress in banks: The case of the Swiss banking industry

AbstractThe global financial crisis of 2007–2009 is widely regarded as the worst since the Great Depression and threatened the global financial system with a total collapse. This article distinguishes itself from the vast literature of bankruptcy, bank failure, and bank exit prediction models by introducing novel categorical parameters inspired by Switzerland's banking landscape. We evaluate data from 274 banks in Switzerland from 2007 to 2017 using generalized linear model logit and multinomial logit regressions and examine the determinants of corporate restructuring and financial distress. We complement our results with a robustness test via a Bayesian inference framework. We find that total assets and net interest margin affect bank exit and mergers and acquisitions, and that banks operating in the Zurich area have a higher likelihood of exiting and becoming takeover targets relative to banks operating in the Geneva area.

Organisational renewal model for leveraging a bank’s sustainability and continuity during periods of discontinuities: a perspective from the caribbean financial markets

As financial institutions are often faced with a series of turbulences that unfold in the Caribbean financial markets, frequent organisational renewal and self-regeneration become crucial for bolstering a bank's continuity and sustainability. In that context, this study uses a qualitative research method to evaluate the effectiveness of the organizational renewal strategies that are often used by Caribbean banks during periods of turbulence as well as the major impediments of such strategies. Through such analysis, the study aimed to discern the organisational renewal model that can be extracted and suggested for leveraging a bank's sustainability and continuity in the periods of discontinuities. During periods of turbulence, findings from different banks that were drawn from St. Lucia, Barbados, Bahamas, St. Vincent, Grenada and the Dominican Republic signified the organizational renewal strategies that are often used by Caribbean banks to encompass financial service innovations, digital transformation, value-based marketing and CSR-based banking model. But even if that is the case, the efficacy of some of the organisational renewal strategies to turn around the bank's performance during turbulence was still found to be undermined by the hefty costs of change that must be incurred and organisational inertia that limits the flexibility and agility required for the banks in distress to respond. To mitigate such constraints, the study suggests the Organisational Renewal and Self-Regeneration Model which the contemporary banks can adopt to bolster their adaptability, continuity and sustainability during periods of discontinuities. But even if usage of such a model will leverage a bank's sustainability and continuity amid the Caribbean financial markets' discontinuities, future studies must still explore the impact of organisational renewal on a bank's liquidity risks' mitigation during periods of turbulence.

Analysis of factors that cause financial distress in Islamic commercial banks

This research aims to analyze the factors that cause financial distress in Islamic commercial banks in Indonesia so that Islamic banking companies avoid financial difficulties and reduce the possibility of bankruptcy. The population used in this research were 13 Islamic commercial banks registered with the Otoritas Jasa Keuangan (OJK), and sampling used a purposive sampling technique where samples were taken with certain conditions until 9 Islamic commercial banks were selected with a research period of eight years (2015-2022). Data analysis using multiple linear regression and the results obtained showed that the leverage ratio has a negative and significant effect on the occurrence of financial distress, where leverage measurement uses Debt to Equity Ratio (DER) and financial distress measurement uses Z-Score. At the same time, the liquidity ratio has a positive but insignificant effect on financial distress, where liquidity is measured using the Current Ratio (CR).

The Effect of CAMELS Ratio on Banking Distress in Private Banking Sector Listed on The IDX Period 2020 – 2022

This study aims to determine the effects of CAMELS ratio analysis (Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk) on Banking Distress in the private banking sector that is listed on the Indonesian Stock Exchange (IDX) for the period 2019 – 2021. The object of this research is 31 private banks, and the data collection technique uses a purposive sampling technique. The data source needed in the research is secondary data, which is annual financial statements from Indonesian Stock Exchange. This research is conclusive on causality by using the Logistic Regression Analysis technique on IBM SPSS tools version 29 software. The result shows that the variables Capital Adequacy Ratio (CAR) and Non-Performing Loans (NPL) have a positively significant effect on Banking Distress, while Operating Expenses to Operating Income (BOPO), Net Profit Margin (NPM), Return on Assets (ROA), Loan to Deposit Ratio (LDR), and Interest Rate Risk (IRR) have no significant effect on Banking Distress. This study can be a valuable reference for banking sectors in avoiding indicators leading to banking distress. Future researchers can develop the elements from this research, including a more expansive period of interval, carrying more varied independent variables from external factors, and using other more accurate models.

Prediksi Financial Distress Bank Syariah di Indonesia dengan Analisis Risk-Based Bank Rating

This study aims to analyze the effect of Risk-Based Bank Rating (RBBR) conducted by Bank Indonesia in predicting financial distress at islamic commercial banks in Indonesia during the Covid-19 Pandemic crisis. So that both exposures originating from internal and external factors can be analyzed for their influence on the resilience of the financial conditions of islamic commercial banks during the Covid-19 Pandemic crisis. This research is a type of quantitative research with data analysis method used, namely panel data regression analysis.
 This study show the results that Risk-Based Bank Rating (RBBR) which reflect risk exposure to internal and external factors simultaneously influence predicting financial distress in islamic commercial banks in Indonesia during the Covid-19 Pandemic crisis. Besides, individually, variables of Non Performing Financing (NPF), Return on Assets (ROA), RGEC Risk Value, have no effect on financial distress. Meanwhile, if individual testing is carried out on the variables Financing to Deposit Ratio (FDR), Operating Expenses to Operating Income (BOPO), and Capital Adequacy Ratio (CAR) they have an effect on predicting financial distress in islamic commercial banks in Indonesia during the Covid-19 Pandemic crisis.

The spillover effect of bank distress: Evidence from the takeover of Baoshang Bank in China

The recent US regional banking crisis has gained considerable attention due to its potential for contagion and amplification of shocks. This paper employs the difference-in-differences method to examine the spillover effects of a regional bank failure on its peer institutions. By focusing on the bankruptcy case of Baoshang Bank in China, which serves as a natural experiment, we show that the bank's bankruptcy leads to a substantial increase in the riskiness of its peers’ loan portfolios. Specifically, our findings reveal a more pronounced impact on group-based loans, while digital credit remains unaffected. This study introduces a novel mechanism through which bank distress spillovers, providing valuable insights for financial institutions to optimize their lending strategies and for policymakers to make informed policy and regulatory decisions.

How Forced Switches Reveal Switching Costs: Evidence from the Loan Market

Abstract This article proposes a novel way to estimate consumer switching costs and uses Lithuanian credit register data and two bank closures to provide this estimate for the loan market. I show that when a distressed bank’s closure forced firms to switch, they started borrowing at lower interest rates instantly and permanently and that this drop revealed the lower bound of firms’ ex ante switching costs. A healthy bank’s closure showed no such effect. The article’s findings suggest that distressed banks hold up and overcharge firms and that by closing and resolving such banks with good-bank/bad-bank separation regulators can improve firm financing.

Influence of Bank Health Level Using RGEC on Financial Distress of Banks in Indonesia

This study aims to analyze the effect of the soundness level of RGEC-based banks on financial distress banks listed on the IDX in 2018-2021. The number of samples used were 43 banking companies, with the saturated sample method. This research is a causal associative research with a quantitative approach and using logistic regression analysis techniques. Risk profile is measured by NPL/NPF and LDR/FDR, GCG variable is measured by self-assessment GCG, variable earning measured by ROA, NIM, and BOPO, as well as variables capital measure with CAR. The results showed that NPL, ROA, NIM, and BOPO had no effect on financial distress, while LDR, GCG, and CAR have an effect on financial distress banking company. This research contains implications so that in the future the parties related to the condition financial distress pay more attention to the ratios that affect financial distress and maintain the ratio to remain in good condition.

Bank crisis resolution in India

PurposeThe academic literature has examined why bank runs happen based on the work of 2022 Nobel Prize-winning economists Diamond and Dybvig. They have found the source of banking/financial crisis in terms of mismatch between liabilities (deposits being short term and savers wanting to short-term access to their money) and assets (long term and illiquid). The Lakshmi Vilas Bank (LVB) crisis intensified when it came under Prompt Corrective Action (PCA) of the Reserve Bank of India (RBI). This situation provides the opportunity to study whether the elements embodied in the theoretical models like Diamond and Dybvig hold true for LVB crisis. This study aims to examine the reasons for the demise of LVB in India using DuPont financial model, peer group analysis and time series structural break in crucial financial parameters.Design/methodology/approachThe study examines the reason for insolvency of LVB using financial ratios, financial models (DuPont), financial distress model (Z-score) and asset-liability management. The study also adopts univariate structural break models using quarterly financial data covering the key financial measures used in the RBI’s PCA framework.FindingsLVB crisis is like Diamond–Dybvig model, in the sense, savers requiring short-term access to their money (liquidity for their deposits) on the information of high non-performing assets, which further deteriorates the illiquid nature of loan portfolio (assets) of banks. The study finds its profit margin (net interest margin and non-interest margin) and managerial efficiency had started deteriorating since 2018. The study finds that LVB’s main weakness lies in its limited credit appraisal ability, its monitoring and weak internal controls. Lending to sensitive sectors (like real estate, capital markets and commodities) and exposure to large business groups also contributed to its weakness. The study also finds huge, elevated asset-liability mismatch, especially in the short-term maturity buckets. Using univariate econometric time series model, the study also confirms financial weakness being evident much earlier than the time when resolution was undertaken by the RBI through PCA.Research limitations/implicationsThe study has implications for analysing and monitoring financial distress of banks. The study also has implications for devising banking regulation and supervision.Originality/valueThe study brings in a perspective of the banking regulations using the application of PCA framework on a listed private sector bank. The authors combine an accounting ratio model and combine risk measures that could identify the incipient risks in a bank. The authors believe this will help in refinement of banking regulations and better monitoring mechanisms.

Credit expansion, leverage, and banking distress: the puzzle of interwar Italy

Abstract This study analyses the relationship between lending growth, leverage, and distress at the individual bank level for interwar Italy, which experienced remarkable credit expansion in the 1920s. Novel data from archival research based on banking supervision classified documents reveals a large, albeit forgotten, crisis. A puzzle emerges: regression analysis on individual bank balance sheets indicates that leverage and lending growth are not predictors of distress. Complementary indicators show that the features highlighted in the literature on leveraged credit booms do not apply to Italy. Italy’s credit expansion was not a leverage-fuelled credit boom but a process of financial development.

Supervisory stringency, payout restrictions, and bank equity prices

I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in the literature examining voluntary payout reductions that signal bank distress. The results show that using supervisory discretion to take preventative actions in a crisis can be less costly than actions taken once banks are distressed.

Bank resolution mechanisms revisited: Towards a new era of restructuring

Government interventions as a solution to systemic banking crises continue to receive wide criticism. The new regulatory frameworks advocate banks’ bail-ins and resolutions that do not require governments’ involvement. However, as the recent events with Credit Suisse and Silicon Valley Bank show, the government still plays an active role in rescuing and resolving the bank's problems. We use the financial stability model of Goodhart et al.’s (2005, 2006a) to analyze the effects of various bank policy interventions on banks’ performance during the crisis rescue phase. We then explore whether those interventions work effectively in facilitating bank recovery and whether they reduce systemic risk in the long run. We use a unique granular bank-level dataset from 22 advanced economies covering the 1992–2017 period. We find that bank recapitalization without debt resolution measures does not resolve bank distress. The empirical results document that “bad-bank” resolution is positively correlated with a bank’s recovery as well as lower systemic risk. Those findings contribute to the ongoing debate on the optimal bank resolution architecture during systemic events.

Capital buffers, business models and the probability of bank distress: a dynamic panel investigation

PurposeThis paper aims to improve the debate linking the business models of banks to their riskiness by checking if diversification exerts different impacts on the probability of bank distress depending on the level of capital buffers.Design/methodology/approachThe paper focuses on a sample of listed bank holding companies observed between 2007:Q3 and 2022:Q4. The authors use three subindexes of bank diversification. The authors estimate a dynamic model specification using a system generalized method of moments with robust standard errors and consistent estimators under heteroskedasticity and autocorrelation within a panel. Sensitivity and robustness checks are performed.FindingsAsset and income diversification increase the probability of distress in low-capitalized banks during normal periods (excluding periods of crises and high uncertainty). Concerning crisis periods, a marginal increase in asset diversification during the global financial crisis (GFC) and the COVID-19 pandemic crisis induces a more important increase in the probability of failure of well-capitalized banks relative to low-capitalized ones. Contrary to the results obtained for the GFC period, well-capitalized banks were found to pursue more careful funding diversification in reaction to the sudden increase of uncertainty during the Russia–Ukraine war.Research limitations/implicationsPrudential supervision should concentrate on well-capitalized banks to encompass unexpected excessive risk-taking during crisis periods. Regulatory requirements should constrain fragile banks to avoid pursuing assets and income diversification strategies that increase earnings volatility.Originality/valueThe main originality of this paper is to consider the interaction between three different dimensions of bank diversification and capital regulation during stable and unstable periods using the marginal effect analysis. Moreover, this paper uses, initially, the GFC as the reference crisis period to study the impact of capital buffers and diversification interactions on the probability of bank distress. Then, the authors extend the observation period until 2022:Q4 to include two additional major events, namely, the COVID-19 pandemic and the Russia-Ukraine war.

Central Bank Policy and Commercial Banks Distress Level in Nigeria

This study investigated the impact of central bank policy on commercial bank distress Level in Nigeria. Financial time series data were obtained from the central bank of Nigeria statistical bulletin. The data collected were tested using the vector auto regression analysis. The study established that 99.3 percent variation in commercial bank distress level in Nigeria is accounted for by the combined efforts of the explanatory variables of the study. The study concludes that Central Bank of Nigeria must continuously monitor the level of liquidity in order to mitigate any adverse impact on the stability of the financial system.

Non-Performing Loans as a Driver of Banking Distress: A Systematic Literature Review

The main purpose of this paper is to present a systematic literature review of studies on the determinants of non-performing loans (NPLs) published over the period 1987–2022. This paper reviewed 76 studies in 58 peer-reviewed journals. The provocation for this analysis is that the issue of NPLs is attributed to close attention from policymakers and is currently addressed with various measures. The authors synthesize the literature according to the following main boards: macroeconomic factors, bank-specific factors, and industry factors. This study tries to construct the main findings from the numerous studies that are performed concerning NPLs and their determinants. The authors’ motivation is to provide a detailed perspective on NPLs. Hence, this study provides a complete and coherent framework for the researchers to examine the varied NPL literature.