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Start-up banks� default and the role of capital

  • Massimo Libertucci


    (Bank of Italy)

  • Francesco Piersante


    (Bank of Italy)

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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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
Date of revision:
Handle: RePEc:bdi:wptemi:td_890_12
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  15. DeYoung, Robert, 2003. " De Novo Bank Exit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 711-28, October.
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