casmef seminars discussion of : the recapitalization of banking and insurance during the 2007-09...
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CASMEF seminars
Discussion of :
The Recapitalization of Banking and Insurance during the 2007-09 Credit Crisis
Zeno Rotondi – Head of UniCredit Research Italy
May 13, 2011 – LUISS University, Rome
2
Main issue / background literature / findings
1. What are the determinants of banks and insurers recapitalizations during the subprime crisis of 2007-09?
2. No micro-data based empirical analyses (at the moment)
3. The intensity of recapitalizations is related to: exposures to toxic assets
probability of distress (Merton probability of default, MPD)
funding risk
3
Methodology
total obs 97
binomial logit (no capital increase; private market recap/bailout)
ordered logit (no capital increase; private market recap; bailout)
further ordered logits…..up to 5 states ordering
three phases of the crisis are examined: september 2007 (Northern Rock); april 2008 (Bear Stearns); september 2008 (Lehman)
Explanatory variables in the baseline equation:
MPD = Merton probability of default
LIQ = dummy variable which captures liabilities maturity
TOXIC_1 = high toxic asset exposure / tangible common equity
TOXIC_2 = all toxic asset exposure / tangible common equity
No control variables (?)
4
Comments (1/2)
sample small and mixed (different explanatory variables for banks and insurers recap?)
add control variables: type of institution; bank specialization; insurer specialization; country fixed effects; size (log of total assets)
add bank specific regressors (pre-crisis values of bank characteristics, for ex. 2006 values): deposits scaled by total assets; loan loss provisions scaled by total assets;non-performing loans scaled by total gross loans; etc.
what about the intensity of recap?: the recap dummy is equal to one if a bank received at least one capital injection between september 2007- march 2009 and zero otherwise. Recap size implies considering the sum of all capital injections received during this period
5
Comments (2/2)
relevant omitted explanatory variable: Tier1 risk-weighted capital ratio
it is not examined whether more Tier1 capital reduces the probability of being recapitalized: in joint consideration with the fact that many banks appeared to be in compliance with regulatory capital requirements before the crisis (see for example Demirgüç-Kunt et al. 2010) this outcome would be relevant for regulators (i.e. augment the central role of capital requirements compared to the crisis period)
Using the risk-weighted Tier1 capital ratio may lead to identify total balance sheet size as an important predictor of recapitalizations, alternative/additional to the indicators of early warning of financial distress considered in the paper
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