Banking distress in MENA countries and the role of mergers as a strategic policy to resolve distress

This paper studies banking distress in MENA countries and considers the extent to which mergers are used as a solution for resolving individual banking distress. We use a two-level nested logit model to model the interdependence between merger decisions and the distressed state of banks. Both bank-specific variables and macroeconomic variables are deployed to predict banking distress. In line with other recent papers, we challenge the view that specific bank indicators such as CAMEL category and bank size are more significant determinants of banking distress than macroeconomic variables. A comparison of model fits and out-of-sample forecasts indicates that the unordered NL model statistically outperforms a standard logit model by substantial margins. Our empirical study shows that 67% of the distressed banks in our sample are involved in merger transactions and that weak financial status systematically increases the likelihood of a bank being involved in a merger. Distressed state-owned banks are less likely to be a target of a merger transaction. However, global economic conditions do not significantly affect the decision of distressed banks to initiate a merger policy.

Research Highlights►the combination of macroeconomic fundamentals and specific bank factors (Camel variables and size) better explain banking distress. ►this study confirms the superiority of the nested logit model over the standard multinomial logit model. ►the weak financial situation of a bank systematically increases its probability to be involved in a merger.