Do Distressed Banks Really Gamble for Resurrection?
Charles A. Dice Working Paper No. 2019-10
67 Pages Posted: 24 Apr 2019
Date Written: April 23, 2019
We explore the actions of financially distressed banks in two distinct periods that include financial crises (1985-1994, 2005-2014) and differ in bank regulations, especially concerning capital requirements and enforcement. In contrast to the widespread belief that distressed banks gamble for resurrection, we document that distressed banks take actions to reduce leverage and risk, such as reducing asset and loan growth, issuing equity, decreasing dividends, and lowering deposit rates. Despite large differences in regulation between periods, the extent of deleveraging is similar, suggesting that economic forces beyond formal regulations incentivize bank managers to deleverage when their banks are in distress.
Keywords: banks, distress, gamble for resurrection, deleveraging, derisking
JEL Classification: G11, G21, G33
Suggested Citation: Suggested Citation