Which Banks Recover from Large Adverse Shocks?
52 Pages Posted: 9 Oct 2014
Date Written: September 1, 2014
We analyze the fate of 120 Italian banks that experienced abrupt drops in profitability. About 1/3 see their profits recover. These banks were lending to riskier clients than the average in the overall economy prior to their distress. Whether they recover depends on the size of the initial profit drop and general business climate after the shock. But post-shock adjustments made by the bank, particularly to its loan portfolio, are also important. Recovering banks are significantly more aggressive in managing their riskiest clients, perhaps because well-run banks more prudently management risk or because seriously impaired banks gamble for reclamation.
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