This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis

55 Pages Posted: 7 Mar 2011 Last revised: 12 Oct 2011

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Robert Prilmeier

Tulane University - A.B. Freeman School of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: June 14, 2011

Abstract

We investigate whether a bank’s performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank’s poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.

Keywords: Financial crisis, systemic risk, bank returns, short-term funding, LTCM, Russian default

JEL Classification: G01, G21

Suggested Citation

Fahlenbrach, Rüdiger and Prilmeier, Robert and Stulz, René M., This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis (June 14, 2011). Charles A. Dice Center Working Paper No. 2011-10 ; Fisher College of Business Working Paper No. 2011-03-010; AFA 2012 Chicago Meetings Paper; Swiss Finance Institute Research Paper No. 11-19. Available at SSRN: https://ssrn.com/abstract=1779406 or http://dx.doi.org/10.2139/ssrn.1779406

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

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Robert Prilmeier

Tulane University - A.B. Freeman School of Business ( email )

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United States

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

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United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
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Belgium

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