Paths of Glory or Paths of Shame? : an Analysis of Distress Events in European Banking
This paper sheds some new light on banks' distress in Europe, with special attention paid to the period of the global financial crisis (GFC). Unlike in previous research we investigate non-distress ("glory") and distress ("shame") paths of banks from 1 to 4 years prior to a distress event to test how different they are. This approach allows us to outline guidelines for supervisors on how to detect banks generating higher risk of distress several years before its occurrence. We use a balanced panel of data, applying factor and cluster analysis for extraction of distress processes and a logistic regression for distress prediction. We conclude that the differences between distressed and non-distressed banks become more visible 1 and 2 years prior to the distress event. However, liquid assets and loans to assets ratios are significant and stable predictors of banks' distress even 3-4 years in advance. (original abstract)
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