Banks' Business Strategies on the Edge of Distress

Andrea Flori, Simone Giansante, Claudia Girardone, Fabio Pammolli

Research output: Contribution to journal › Article

Abstract

The paper investigates the importance of banks’ business classification in shaping the risk profile of financial institutions on a global scale. We employ a rare-event logit model based on a state-of-the-art list of major global distress events from the global financial crisis. When clustering banks by their business strategies using a community detection approach, we show that (i) capital enhanced resilience only for traditional banks that were on average less capitalized than other banks; (ii) boosting ROE, usually associated with riskier exposures, improved resilience for stable funded and asset diversified banks; (iii) conversely, higher levels of ROA exacerbated banks’ vulnerability when associated with concentrated (not-diversified) investment structures; (iv) size in terms of total assets contributed to instability only for wholesale-funded institutions due to their high levels of unstable funding. Liquidity, on the contrary, reduced the institution likelihood of being in distress, regardless of its business classification. Although our findings refer to the recent financial crisis, they provide evidence that a tailored risk monitoring based on a proper peer group identification can facilitate banks’ distresses prediction.
Original languageEnglish
Pages (from-to)1-50
Number of pages50
JournalAnnals of Operations Research
Early online date24 Sep 2019
DOIs
Publication statusE-pub ahead of print - 24 Sep 2019

Keywords

  • Bank business strategies
  • Bank distress
  • Clustering
  • Financial crisis

ASJC Scopus subject areas

  • Decision Sciences(all)
  • Management Science and Operations Research

Cite this

Banks' Business Strategies on the Edge of Distress. / Flori, Andrea; Giansante, Simone; Girardone, Claudia; Pammolli, Fabio.

In: Annals of Operations Research, 24.09.2019, p. 1-50.

Research output: Contribution to journal › Article

Flori, A, Giansante, S, Girardone, C & Pammolli, F 2019, 'Banks' Business Strategies on the Edge of Distress', Annals of Operations Research, pp. 1-50. https://doi.org/10.1007/s10479-019-03383-z
Flori A, Giansante S, Girardone C, Pammolli F. Banks' Business Strategies on the Edge of Distress. Annals of Operations Research. 2019 Sep 24;1-50. https://doi.org/10.1007/s10479-019-03383-z
Flori, Andrea ; Giansante, Simone ; Girardone, Claudia ; Pammolli, Fabio. / Banks' Business Strategies on the Edge of Distress. In: Annals of Operations Research. 2019 ; pp. 1-50.
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