Page 22 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

BANKING
“At the outset of this study, it was our supposition that banks that were more reliant in their liability structure on the interbank market prior to the crisis, would have been those banks that would have been more likely to have failed.”
perform such an analysis. e rst is that there are signi cant problems with understanding and creating a stable de nition of default owing to the extreme interventions performed by governments in di erent manners across the world. It is very di cult to say, for example, that Royal Bank of Scotland (RBS) failed or did not fail. It was certainly bailed out. Certain banks de nitely failed though, for example Landsbanki in Iceland.
Goldman Sachs, as a further example – which was not in fact a bank at the time but was forced post-crisis to become a bank holding group – was, according to Lloyd Blankfein its CEO, forced to take bailout money from the Troubled Asset Relief Program (TARP). is USD 750 billion bailout fund was set up by Hank Paulson, Goldman Sachs’ previous CEO.
From an analytical perspective, therefore, it was essential to settle upon a clear de nition of default that we could use in our study of what the frequency of default of banks was post-crisis, as well as which ratios might have been indicative of failure pre-crisis. e second problem that presents itself, from an analytical perspective, is that the rules created by the BCBS for LCR and NSFR were based on new underlying information that would form either part of the numerator or the denominator of those ratios. at information prior to the Financial Crisis was not publically available and is not publically available since the crisis – in all the forms it would need to be in order to reconstruct those ratios for banks – unless one had insider information.
As such, it was decided that we would address these two issues for the study in the following manner. Firstly, through literature research, we came across a study by McKinsey – Working Papers on Risk, Number 15 (2009): Capital Ratios and Financial Distress Lessons from the Crisis. is study had been conducted on the same basis that we wished to conduct our study, i.e. to examine whether nancial ratio analysis would have been a good indicator of nancial distress post-crisis. is study examined a sample of 115 banks, their nancial distress outcome post-crisis, and the ability of their ratios to predict this outcome. e criteria for the sample banks was that the banks needed to have a minimum asset size of USD 30 billion representing USD 62.2 trillion in total assets – about 85 percent of developed-market banking assets, and 65 percent of total banking assets worldwide. Broker-dealers speci- cally were excluded from their analysis as data on risk-weighted assets
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