Bailouts and the Modeling of Bank Distress
Journal of Financial Research (forthcoming)
67 Pages Posted: 20 Jan 2019 Last revised: 21 Nov 2022
Date Written: October 10, 2022
This study develops 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 banks compared to small ones. 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. Interestingly, the cost of funding in large banks is negatively correlated with the probability of failure, reflecting lenders internalizing the too-big-to-fail (TBTF)) policy and demanding a lower interest from TBTF banks.
Keywords: Banks, Bankruptcy, Closure, Bailouts, Too-Big-to-Fail, Systemically Important Financial Institution
JEL Classification: G21, G28, G33
Suggested Citation: Suggested Citation