1. 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

2. 2 Main issue / background literature / findings 1.What are the determinants of banks and insurers recapitalizations during the subprime crisis of 2007-09? 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

3. 3 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 (?)

4. 4 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 2007- march 2009 and zero otherwise. Recap size implies considering the sum of all capital injections received during this period

5. 5 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