Bailouts and the modeling of bank distress

Koresh Galil, Margalit Samuel, Offer Moshe Shapir, Wolf Wagner

Research output: Contribution to journalArticlepeer-review


In this article, we develop a model for predicting distress events among large banks. We show that a bailout possibility induces different behaviors among small and large banks, and the proposed failure prediction model for large banks is thus considerably different from that for small banks. Major bank-level fundamentals show opposite conjecture directions for large versus small banks. The Tier 1 capital ratio, which is under the scrutiny of regulators and investors, has almost no distress prediction power among large banks. However, banks rescued by governments tend to maintain a lower Tier 1 ratio. The cost of funding in large banks is negatively correlated with the probability of failure, reflecting the fact that lenders internalize the too-big-to-fail (TBTF) policy and demand a lower interest rate from TBTF banks.

Original languageAmerican English
Pages (from-to)7-30
Number of pages24
JournalJournal of Financial Research
Issue number1
StatePublished - 1 Feb 2023

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance


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