Claudia M. Buch (Tübingen)1 Which Banks Recover from a Banking Crisis? by Emilia Bonaccorsi di Patti & Anil K. Kashyap Discussion by Claudia M. Buch (University of Tübingen & CESifo) Deutsche Bundesbank – Banque de France June 8-9, 2009, Paris

Claudia M. Buch (Tübingen)2 What‘s the issue? Bank distress is caused by idiosyncratic and macroeconomic shocks.  Which factors determine how long it takes – and whether – banks recover from such shocks?  How do these shocks and subsequent recovery affect the lending policies of banks? The authors answer this question using a novel and very detailed bank-level and firm-level dataset for Italy.

Claudia M. Buch (Tübingen)3 The empirical approach 1st stage regression: Distress event = large drop in ROA (absolute and relative) Logit model: Probability of recovery = f (bank-specific factors, macroeconomic factors) Study banks that survive and recover and banks that don’t recover – no exits! 2nd stage regression: Fixed effects model Firm-level credit growth = f (risk, z-score, relationship data, borrower controls, bank fixed effects)

Claudia M. Buch (Tübingen)4 The main results Troubled banks have riskier clients. Recovery … –… is faster the smaller the initial shock. –… is faster the better the business climate. –… depends on factors which are under the control of the bank and factors which are not. Adjustment of the loan portfolio is crucial: Recovering banks impose tougher standards on risky customers.

Claudia M. Buch (Tübingen)5 Overall assessment This – obviously – is a highly topical paper which is of immediate relevance for current academic and policy debates. It uses a novel dataset and suitable empirical techniques. –The empirical approach and the data are well documented, and the structure of the data is well explained. There are a couple of routes for future research, addressing specific policy questions and theoretical hypotheses.

Claudia M. Buch (Tübingen)6 Comments Empirical issues Reverse causality Dynamics Theoretical issues Macroeconomic versus idiosyncratic risks Direct versus indirect recapitalization Policy issues Bail-out expectations Banking regulations

Claudia M. Buch (Tübingen)7 Comment 1: Reverse causality and dynamics The probability of recovery depends on idiosyncratic risk which is driven by adjustment of the loan portfolio. But the banks’ scope to adjust the loan portfolio also depends on the route to recovery.  Would it be possible to account for the reverse causality between recovery and lending?  What are the dynamics of the adjustment process? To what extent does adjustment of lending portfolio feed back into recovery?

Claudia M. Buch (Tübingen)8 Comment 2: Macroeconomic vs. idiosyncratic risks The paper distinguishes idiosyncratic, regional, and macroeconomic shocks.  What is the relative importance of macroeconomic and idiosyncratic risk factors?  Which banks react most to macroeconomic shocks? Answering these questions would be important to answer important theoretical and – ultimately – policy questions:  Why are banks exposed to macroeconomic risks in the first place? (cf. Hellwig)

Claudia M. Buch (Tübingen)9 Systemic factors Exposure to macroeconomic risk factors implies that many banks are hit by the same shock. Are the adjustments across banks independent from each other? Or does it matter whether all banks have been hit by the same shock and whether all banks try to adjust their assets and liabilities simultaneously? Comment 2: Macroeconomic vs. idiosyncratic risks

Claudia M. Buch (Tübingen)10 Comment 3: Direct vs. indirect recapitalization Recent debates on how to deal with distressed banks have focused on asset- versus liability-side restructuring: –Bad Banks / asset purchases –Recapitalization / nationalization It would be interesting to know whether the banks under study have used these approaches – and which have been more successful. To what extent has asset-side restructuring of the loan portfolio been facilitated by changes in management?

Claudia M. Buch (Tübingen)11 Comment 4: Policy Issues Bail-out expectations Is there information on the ownership structure of banks – and have privately and state-owned banks behaved differently? To what extent have too-big-too-fail issues played a role? Banking regulations Should (and could) regulatory requirements be tied to banks’ exposure to macroeconomic shocks?