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JEL Classification: G01, G21, E58
Keywords: recapitalization, systemically important banks, time of crisis, profitability
Abstract
In this paper we study the effects of bank recapitalization on profitability during the recent global financial crisis. We used data from 91 systemically important banks in the EU and the US. We found that a higher amount of recapitalization increases a bank's profitability with a lag of one year. Recapitalizations performed in the first two years of the crisis had an immediate negative effect on profitability but it became positive when we tested it at the end of our analysed period, i.e. when most of the banks were out of the crisis. The positive effect on profitability was present only in banks recapitalized in the first two years of the crisis and negative for banks recapitalized later on in the crisis. When we simultaneously tested the effect of time and the amount of recapitalization, we found that in banks recapitalized in the first two years of the crisis, the positive effect on profitability increased with the amount of recapitalization.
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1.Introduction
During a crisis, banks usually face heavy losses and new capital is often needed to cover capital shortcomings. One possible way to increase capital is with retained earnings, but the much more difficult question is how to regain profitability quickly and efficiently. One of the main goals of bank management in a time of distress is to achieve safety, stability, and to recover lost confidence. This should result in a quicker, more sufficient and sustainable return to profitability. The relevance of profitability is even more important during a time of crisis and in a low interest rate environment, as is currently the case. Capital is the first line of defence against losses and the inability to build up capital buffers from retained earnings could affect capital adequacy, especially in times of crisis, when raising equity is much harder (Kok et al., 2015).
Several empirical studies (Banetjee et al., 2015; van Ommeren, 2011; Kok et al., 2015; Dietrich and Wanzenried, 2011; Petria et al., 2015) have looked into the effects of different determinants on bank profitability in a time of crisis. It is vital that bank management is familiar with these determinants so that...