Determinants of financial distress in u.s. large bank holding companies

zhang, zhichao and Xie, Li and lu, xiangyun and zhang, zhuang (2014): Determinants of financial distress in u.s. large bank holding companies.

Abstract

With a sample of 354 U.S. large bank holding companies, this paper investigates the determination of financial distress in financial institutions. We find that: (1) the house price index is consistently significant and positively associated with the Distance-to-Default (DD) measure in the U.S. banking market; (2) all the three major banking risk characteristics i.e. non-performing loans, short-term wholesale funding, and the credit-risk indicator are reliable factors behind DD determination; (3) for the two alternative measures of BHC activity diversification, non-interest income is positively related with BHCs’ DD whereas off-balance-sheet activity is negatively associated to the financial distress measure; and (4) Relevant capital requirements indicators including Tier I Risk-Based Capital Ratio, Total Risk-Based Capital Ratio, Tier I Leverage Ratio should be taken in regulatory assessment of BHCs’ financial distress.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank Holding Company; Distance-to-Default; Financial distress; Bank regulation; Capital requirements; Non-interest income; Off-balance-sheet activities.
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Abreu, J. F., Gulamhussen, M. A., 2013. Dividend payouts: Evidence from U.S. bank holding companies in the context of the financial crisis. Journal of Corporate Finance. 22, 54-65.

Acharya, V. V., Richardson, M., 2012. Implications of the Dodd-Frank Act. Annu. Rev. Financ. Econ. 4, 1-38.

Adams, R., Mehran, H., 2003. Is corporate governance different for bank holding companies? Economic Policy Review. 123-142.

Admati, A. R., DeMarzo, P.M., Hellwig, M.F., Pfleiderer, P., 2010. Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive. Max Planck Institute for Research on Collective Goods.

Allen, F., Babus, A., Carletti, E., 2009. Financial crises: theory and evidence. Annu. Rev. Financ. Econ. 1, 97-116.

Ashcraft, A. B., 2008. Are bank holding companies a source of strength to their banking subsidiaries? Journal of Money, Credit and Banking. 40, 273-294.

Avraham, D., Selvaggi, P., Vickery, J., 2012. A Structural View of US Bank Holding Companies. Economic Policy Review. 18.

Balboa, M., López-Espinosa, G., Ray, K., Rubia, A., 2012. Executive Compensation and Systemic Risk: The Role of Non-Interest Income and Wholesale Funding. School of Economics and Business Administration, University of Navarra.

Bennett, R. L., Güntay, L., Unal, H., 2012. Inside Debt, Bank Default Risk and Performance during the Crisis.

Black, F., Scholes, M., 1973. The pricing of options and corporate liabilities. The journal of political economy. 637-654.

Blundell-Wignall, A., Roulet, C., 2012. Business models of banks, leverage and the distance-to-default. OECD Journal: Financial Market Trends. 2012, 1-28.

Brunnermeier, M., Dong, G., Palia, D., 2012. Banks’ non-interest income and systemic risk. American Finance Association 2012 Chicago Meetings Paper.

Cetorelli, N., et al., 2012. The evolution of banks and financial intermediation: framing the analysis. Economic Policy Review. 12, 1-12.

Copeland, A., 2012. Evolution and Heterogeneity among Larger Bank Holding Companies: 1994 to 2010. Federal Reserve Bank of New York Economic Policy Review. 18, 83-93.

Cornett, M. M., et al., 2009. Corporate governance and earnings management at large US bank holding companies. Journal of Corporate Finance. 15, 412-430.

Crosbie, P., Bohn, J., 2003. Modeling default risk.

Curry, T. J., McNutt, J.J., Tehranian, H., 2008. Is there cyclical bias in bank holding company risk ratings? Journal of Banking & Finance. 32, 1297-1309.

Deng, S. E., Elyasiani, E., 2008. Geographic diversification, bank holding company value, and risk. Journal of Money, Credit and Banking. 40, 1217-1238.

Duffie, J. D., 2012. Market making under the proposed Volcker rule. Rock Center for Corporate Governance at Stanford University Working Paper.

Ellul, A., Yerramilli, V., 2013. Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies. The Journal of Finance. 68, 1757-1803.

Elyasiani, E., Wang, Y., 2008. Non-interest income diversification and information asymmetry of bank holding companies. Unpublished manuscript, FMA: http://www. fma. org/Texas/Papers/BHC_Diversification_Asymmetric. pdf.

Elyasiani, E., Wang, Y., 2012. Bank holding company diversification and production efficiency. Applied Financial Economics. 22, 1409-1428.

Flannery, M. J., 2012. Corporate Finance and Financial Institutions. Annual Review of Financial Economics. 4, 233-253.

Fleming, M. J., 2012. Federal Reserve Liquidity Provision during the Financial Crisis of 2007–2009. Annual Review of Financial Economics. 4, 161-177.

Furlong, F. T., 2000. The Gramm-Leach-Bliley Act and financial integration. FRBSF Economic Letter.

Goetz, M. R., Laeven, L., Levine, R., 2013. Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of US Banks. Review of Financial Studies. 26, 1787-1823.

Greenwood, R., Scharfstein, D., 2013. The Growth of Finance. Journal of Economic Perspectives. 27, 3-28.

Jarrow, R. A., 2009. Credit Risk Models. Annual Review of Financial Economics. 1, 37-68.

Kisin, R., Manela, A., 2013. The Shadow Cost of Bank Capital Requirements.

Klebaner, B. J., 1958. The Bank Holding Company Act of 1956. Southern Economic Journal. 313-326.

Köhler, M., 2013. Does non-interest income make banks more risky? Retail-versus investment-oriented banks. Deutsche Bundesbank, Research Centre.

Laeven, L., 2011. Banking crises: A review. Annu. Rev. Financ. Econ. 3, 17-40.

Laeven, L., Valencia, F., 2012. Systemic Banking Crises Database: An Update. International Monetary Fund.

Li, S., Marinč, M., 2013. Why Do Banks Use Financial Derivatives?

Merton, R. C., 1974. On The Pricing of Corporate Debt: The Risk Structure of Interest Rates. The Journal of Finance. 29, 449-470.

Minton, B., Williamson, R., Stulz, R., 2005. How Much Do Banks Use Credit Derivatives to Reduce Risk? NBER Working Paper.

Stiroh, K. J., 2004. Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking. 853-882.

Stiroh, K. J., Rumble, A., 2006. The dark side of diversification: The case of US financial holding companies. Journal of Banking & Finance. 30, 2131-2161.

Sundaresan, S., 2013. A Review of Merton’s Model of the Firm’s Capital Structure with Its Wide Applications. Annual Review of Financial Economics. 5, 21-41.

Sundaresan, S. M., 2000. Continuous-Time Methods in Finance: A Review and an Assessment. The Journal of Finance. 55, 1569-1622.