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Recovery Determinants of Distressed Banks: Regulators, Market Discipline, or the Environment?

Author/Editor: Koetter, Michael | Poghosyan, Tigran | Kick, Thomas
Authorized for Distribution: January 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,569KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Based on detailed regulatory intervention data among German banks during 1994-2008, we test if supervisory measures affect the likelihood and the timing of bank recovery. Severe regulatory measures increase both the likelihood of recovery and its duration while weak measures are insignificant. With the benefit of hindsight, we exclude banks that eventually exit the market due to restructuring mergers. Our results remain intact, thus providing no evidence of "bad" bank selection for intervention purposes on the side of regulators. More transparent publication requirements of public incorporation that indicate more exposure to market discipline are barely or not at all significant. Increasing earnings and cleaning credit portfolios are consistently of importance to increase recovery likelihood, whereas earnings growth accelerates the timing of recovery. Macroeconomic conditions also matter for bank recovery. Hence, concerted micro- and macro-prudential policies are key to facilitate distressed bank recovery.
 
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Series: Working Paper No. 10/27
Subject(s): Bank resolution | Bank soundness | Bank supervision | Banking crisis | Banks | Credit risk | Economic models | Risk management
Author's keyword(s): Bank distress | capital support | regulation | recovery
 
English  
    Published:   January 1, 2010        
    ISBN/ISSN:   9781451962499   Format:   Paper
    Stock No:   WPIEA2010027   Pages:   63
    Price:   US$18.00
       
     
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