Determinants of Financial Distress in U.S. Large Bank Holding Companies

36 Pages Posted: 9 Feb 2014

See all articles by Zhichao Zhang

Zhichao Zhang

Durham University - Durham Business School

Li Xie

Xi'an Jiaotong University (XJTU)

Xiangyun Lu

Xi'an Jiaotong-Liverpool University (XJTLU)

Zhuang Zhang

University of Southampton - Southampton Business School

Date Written: January 31, 2014

Abstract

With a sample of 354 U.S. large bank holding companies, this paper investigates the determination of financial distress in financial institutions. We find that: (1) the house price index is consistently significant and positively associated with the Distance-to-Default (DD) measure in the U.S. banking market; (2) all the three major banking risk characteristics i.e. non-performing loans, short-term wholesale funding, and the credit-risk indicator are reliable factors behind DD determination; (3) for the two alternative measures of BHC activity diversification, non-interest income is positively related with BHCs’ DD whereas off-balance-sheet activity is negatively associated to the financial distress measure; and (4) Relevant capital requirements indicators including Tier I Risk-Based Capital Ratio, Total Risk-Based Capital Ratio, Tier I Leverage Ratio should be taken in regulatory assessment of BHCs’ financial distress.

Keywords: Bank Holding Company; Distance-to-Default; Financial distress; Bank regulation; Capital requirements; Non-interest income; Off-balance-sheet activities

JEL Classification: C53, G14, G21, G28

Suggested Citation

Zhang, Zhichao and Xie, Li and Lu, Xiangyun and Zhang, Zhuang, Determinants of Financial Distress in U.S. Large Bank Holding Companies (January 31, 2014). Available at SSRN: https://ssrn.com/abstract=2392892 or http://dx.doi.org/10.2139/ssrn.2392892

Zhichao Zhang

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Li Xie (Contact Author)

Xi'an Jiaotong University (XJTU) ( email )

26 Xianning W Rd.
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

Xiangyun Lu

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Ren'ai Road, Suzhou, Dushu lake
, Lake Science and Education Innovation District
Suzhou, Jiangsu 215123
China

Zhuang Zhang

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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