摘要：Bank failures are costly to customers and the wider market. Prevention is always better than
cure but in light of recent economic downturns, it has become increasingly difficult for
regulators to allocate more resources towards in-depth monitoring of banking practices. In this
paper, we construct a tool that is able to predict bank failures ahead of time with reasonable
accuracy. Through a logistic regression on a matched sample of 536 failed and non-failed US
banks, we determine the financial indicators that most accurately predicts bank failure. From
the regression, we construct a Bank Health Index that assesses a bank’s propensity to failure.
In-sample and out-of-sample tests show that our model is about 90% accurate two years prior
to failure, and 95% accurate the year before failure. The accuracy and efficiency of the model
and index provides a more efficient and effective tool for assessing a bank’s propensity to
failure besides requiring far less resources. With these methods, regulators will be able to take
preventive measures at least one year before failure, saving the economy millions if not billions
in the process.
其他摘要：Bank failures are costly to customers and the wider market. Prevention is always better than cure but in light of recent economic downturns, it has become increasingly difficult for regulators to allocate more resources towards in-depth monitoring of banking practices. In this paper, we construct a tool that is able to predict bank failures ahead of time with reasonable accuracy. Through a logistic regression on a matched sample of 536 failed and non-failed US banks, we determine the financial indicators that most accurately predicts bank failure. From the regression, we construct a Bank Health Index that assesses a bank’s propensity to failure. In-sample and out-of-sample tests show that our model is about 90% accurate two years prior to failure, and 95% accurate the year before failure. The accuracy and efficiency of the model and index provides a more efficient and effective tool for assessing a bank’s propensity to failure besides requiring far less resources. With these methods, regulators will be able to take preventive measures at least one year before failure, saving the economy millions if not billions in the process.
关键词：Bank failure; Financial crisis; Failure prediction; Commercial banks; Early
warning system
