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This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis

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  • RÜDIGER FAHLENBRACH
  • ROBERT PRILMEIER
  • RENÉ M. STULZ

Abstract

We investigate whether a bank's performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank's poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.

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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2012.01783.x
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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 67 (2012)
Issue (Month): 6 (December)
Pages: 2139-2185

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Handle: RePEc:bla:jfinan:v:67:y:2012:i:6:p:2139-2185

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  1. Ing-Haw Cheng & Harrison Hong & Jose A. Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Working Papers 16176, National Bureau of Economic Research, Inc.
  2. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 373-416.
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  4. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," Working Papers 2010.114, Fondazione Eni Enrico Mattei.
  5. Tobias Adrian & Hyun Song Shin, 2009. "Money, liquidity, and monetary policy," Staff Reports 360, Federal Reserve Bank of New York.
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Cited by:
  1. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2012. "How does deposit insurance affect bank risk ? evidence from the recent crisis," Policy Research Working Paper Series 6289, The World Bank.
  2. Milne, Alistair, 2014. "Distance to default and the financial crisis," Journal of Financial Stability, Elsevier, vol. 12(C), pages 26-36.
  3. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
  4. Weiß, Gregor N.F. & Bostandzic, Denefa & Neumann, Sascha, 2014. "What factors drive systemic risk during international financial crises?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 78-96.
  5. John Thanassoulis, 2011. "Industrial Structure, Executives' Pay And Myopic Risk Taking," Economics Series Working Papers 571, University of Oxford, Department of Economics.
  6. Varvara Isyuk, 2013. "Determinants of the Allocation of Funds Under the Capital Purchase Program," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 79-114, January.
  7. L. Baele & V. De Bruyckere & O. De Jonghe & R. Vander Vennet, 2012. "Do Stock Markets Discipline US Bank Holding Companies: Just Monitoring, or also In‡uencing?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/827, Ghent University, Faculty of Economics and Business Administration.
  8. Hoque, Hafiz, 2013. "From the credit crisis to the sovereign debt crisis: Determinants of share price performance of global banks," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 334-350.
  9. Weiß, Gregor N.F. & Neumann, Sascha & Bostandzic, Denefa, 2014. "Systemic risk and bank consolidation: International evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 165-181.

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