Start-up banks’ default and the role of capital
AbstractRegulation 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 InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 890.
Date of creation: Nov 2012
Date of revision:
bank capital; survival analysis; probability of default analysis; start-up banks; counterfactual analysis;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-CFN-2012-12-22 (Corporate Finance)
- NEP-ENT-2012-12-22 (Entrepreneurship)
- NEP-RMG-2012-12-22 (Risk Management)
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