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Distress resolution strategies in the banking sector: Implications for global financial crises

International Banking in the New Era: Post-Crisis Challenges and Opportunities

ISBN: 978-1-84950-912-1, eISBN: 978-1-84950-913-8

Publication date: 8 November 2010

Abstract

This chapter investigates the effectiveness and the motivation behind the choice of different types of distress resolution strategies in the banking sector. This is a global study that analyzes key financial characteristics of distressed banks that were either acquired by other banks, divested assets, or were subject to government intervention, as well as the change in the financial profile of those distressed institutions from one year pre-deal to three years post-deal. The results show that governments intervene in the (relatively) best performers that only underperform in liquidity ratios, an indication of critical short-term flow problems. Distressed sellers, the underperformers of the three groups, enjoy much improved performance, in particular in cross-border deals. There is some evidence of foreign acquirers “cherry picking” the least distressed banks, though no significant differences in target performance remain post-deal between cross-border and domestic deals. These findings provide some useful guidance for policy makers globally and for future financial crises that impact the banking sector.

Citation

Carapeto, M., Moeller, S., Faelten, A., Vitkova, V. and Bortolotto, L. (2010), "Distress resolution strategies in the banking sector: Implications for global financial crises", Kim, S.-J. and Mckenzie, M.D. (Ed.) International Banking in the New Era: Post-Crisis Challenges and Opportunities (International Finance Review, Vol. 11), Emerald Group Publishing Limited, Leeds, pp. 335-360. https://doi.org/10.1108/S1569-3767(2010)0000011015

Publisher

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Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited