Working Paper Series Do Distressed Banks Really Gamble for Resurrection ?

We explore the actions of financially distressed banks in two distinct periods that include financial crises (1985-1994, 2005-2014) and differ in bank regulations, especially concerning capital requirements and enforcement. In contrast to the widespread belief that distressed banks gamble for resurrection, we document that distressed banks take actions to reduce leverage and risk, such as reducing asset and loan growth, issuing equity, decreasing dividends, and lowering deposit rates. Despite large differences in regulation between periods, the extent of deleveraging is similar, suggesting that economic forces beyond formal regulations incentivize bank managers to deleverage when their banks are in distress. Itzhak Ben-David The Ohio State University Fisher College of Business 606A Fisher Hall Columbus, OH 43210-1144 and NBER ben-david.1@osu.edu Ajay A. Palvia Office of the Comptroller of the Currency 400 7th St SW Washington, DC 20024 Ajay.Palvia@occ.treas.gov René M. Stulz The Ohio State University Fisher College of Business 806A Fisher Hall Columbus, OH 43210-1144 and NBER stulz@cob.osu.edu