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Banks' business strategies on the edge of distress

Flori, Andrea and Giansante, Simone and Girardone, Claudia and Pammolli, Fabio (2021) 'Banks' business strategies on the edge of distress.' Annals of Operations Research, Online (1-2). pp. 1-50. ISSN 0254-5330

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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.

Item Type: Article
Uncontrolled Keywords: Bank business strategies; Clustering; Bank distress; Financial crisis
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 26 Sep 2019 16:01
Last Modified: 18 Aug 2022 12:41

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