Do Distressed Banks Really Gamble for Resurrection?

67 Pages Posted: 7 May 2019

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Ajay A. Palvia

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

René Stulz

Ohio State University (OSU) - Fisher College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

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.

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Suggested Citation

Ben-David, Itzhak and Palvia, Ajay A. and Stulz, René, Do Distressed Banks Really Gamble for Resurrection? (May 2019). NBER Working Paper No. w25794. Available at SSRN: https://ssrn.com/abstract=3383293

Itzhak Ben-David (Contact Author)

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

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Ajay A. Palvia

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

René Stulz

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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