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
Main issue / background literature / findings
1. What are the determinants of banks and insurers
recapitalizations during the subprime crisis of 2007-09?
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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
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 (?)
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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 2007march 2009 and zero otherwise. Recap size implies considering the sum
of all capital injections received during this period
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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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