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Start-up banks’ default and the role of capital

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  • Massimo Libertucci

    ()
    (Bank of Italy)

  • Francesco Piersante

    ()
    (Bank of Italy)

Abstract

Regulation requires banks to hold a minimum capital endowment upon their establishment. But what role does initial capital play in a bank’s lifecycle? This paper addresses the issue for start-up banks. We use both survival-time and binary choice models for a sample of newly-established Italian banks in the period 1994-2006, controlling for a broad set of possible drivers of default, such as market, managerial and financial variables. Our results suggest that initial capital does play a leading role in explaining both the timing and the likelihood of a failure. Other important drivers are organisation and a balanced growth path, while market and management variables appear to play a minor role. We then turn to a quasi-experimental design: exploiting a regulatory shift in 1999 we run a counterfactual analysis of the impact of a regulatory tightening of initial capital, which affected only a subsample of banks. The set of results suggests that the effect on banks’ survival may be significant.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 890.

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Date of creation: Nov 2012
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Handle: RePEc:bdi:wptemi:td_890_12

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Related research

Keywords: bank capital; survival analysis; probability of default analysis; start-up banks; counterfactual analysis;

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Cited by:
  1. Michele Leonardo Bianchi & Svetlozar T. Rachev & Frank J. Fabozzi, 2013. "Tempered stable Ornstein-Uhlenbeck processes: a practical view," Temi di discussione (Economic working papers) 912, Bank of Italy, Economic Research and International Relations Area.

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