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Capital ratios as predictors of bank failure

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Author Info
Arturo Estrella
Sangkyun Park
Stavros Peristiani

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Abstract

The current review of the 1988 Basel Capital Accord has put the spotlight on the ratios used to assess banks’ capital adequacy. This article examines the effectiveness of three capital ratios—the first based on leverage, the second on gross revenues, and the third on risk-weighted assets—in forecasting bank failure over different time frames. Using 1988-93 data on U.S. banks, the authors find that the simple leverage and gross revenue ratios perform as well as the more complex risk-weighted ratio over one- or two-year horizons. Although the risk-weighted measures prove more accurate in predicting bank failure over longer horizons, the simple ratios are less costly to implement and could function as useful supplementary indicators of capital adequacy.

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Publisher Info
Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2000)
Issue (Month): Jul ()
Pages: 33-52
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Handle: RePEc:fip:fednep:y:2000:i:jul:p:33-52:n:v.6no.2

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Related research
Keywords: Bank failures ; Bank capital ; Banks and banking - Ratio analysis;

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References listed on IDEAS
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  1. Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  2. Jones, David S. & King, Kathleen Kuester, 1995. "The implementation of prompt corrective action: An assessment," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 491-510, June. [Downloadable!] (restricted)
  3. Joe Peek & Eric S. Rosengren, 1997. "How well capitalized are well-capitalized banks?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 41-50. [Downloadable!]
  4. Cole, Rebel A. & Gunther, Jeffery W., 1995. "Separating the likelihood and timing of bank failure," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 1073-1089, September. [Downloadable!] (restricted)
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  5. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roman Kraeussl, 2003. "A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II," CFS Working Paper Series 2003/23, Center for Financial Studies. [Downloadable!]
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  2. Douglas Evanoff & Larry Wall, 2001. "Sub-debt Yield Spreads as Bank Risk Measures," Journal of Financial Services Research, Springer, vol. 20(2), pages 121-145, October. [Downloadable!] (restricted)
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  3. Andrew Logan, . "The United Kingdom's small banks' crisis of the early 1990s: what were the leading indicators of failure?," Bank of England working papers 139, Bank of England. [Downloadable!]
  4. Peresetsky, Anatoly A. & Karminsky, Alexandr A. & Golovan, Sergei V., 2004. "Probability of default models of Russian banks," BOFIT Discussion Papers 21/2004, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  5. Fidrmuc, Jarko & Süß, Philipp Johann, 2009. "The Outbreak of the Russian Banking Crisis," Discussion Papers in Economics 10996, University of Munich, Department of Economics. [Downloadable!]
  6. De Graeve, Ferre & Kick, Thomas, 2008. "Monetary policy and bank distress: an integrated micro-macro approach," Discussion Paper Series 2: Banking and Financial Studies 2008,03, Deutsche Bundesbank, Research Centre. [Downloadable!]
  7. Jose E. Gomez-Gonzalez & Nicholas M. Kiefer, . "Explaining time to bank failure in Colombia during the financial crisis of the late 1990s," Borradores de Economia 400, Banco de la Republica de Colombia. [Downloadable!]
  8. Birgit Schmitz, 2007. "The impact of Basel I capital regulation on bank deposits and loans: Empirical evidence for Europe," Money Macro and Finance (MMF) Research Group Conference 2006 42, Money Macro and Finance Research Group. [Downloadable!]
  9. John Krainer & Jose A. Lopez, 2003. "How might financial market information be used for supervisory purposes?," Economic Review, Federal Reserve Bank of San Francisco, pages 29-45. [Downloadable!]
  10. Robert Bichsel & Jürg Blum, 2004. "The relationship between risk and capital in Swiss commercial banks: a panel study," Applied Financial Economics, Taylor and Francis Journals, vol. 14(8), pages 591-597, May. [Downloadable!] (restricted)
  11. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2002. "Could a CAMELS downgrade model improve off-site surveillance?," Review, Federal Reserve Bank of St. Louis, issue Jan., pages 47-63. [Downloadable!]
  12. Klaus Schaeck & Simon Wolfe, 2005. "Identifying "Problem Banks" in the German Co-operative and Savings Bank Sector: An Econometric Analysis," Money Macro and Finance (MMF) Research Group Conference 2005 44, Money Macro and Finance Research Group. [Downloadable!]
  13. Guo Li & Lee Sanning & Sherrill Shaffer, 2009. "Statistical Opacity In The U.S. Banking Industry," CAMA Working Papers 2009-16, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  14. Gomez-Gonzalez, Jose E. & Kiefer, Nicholas M., 2006. "Bank Failure: Evidence from the Colombia Financial Crisis," Working Papers 06-12, Cornell University, Center for Analytic Economics. [Downloadable!]
  15. Huberto M. Ennis, 2004. "Some recent trends in commercial banking," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 41-61. [Downloadable!]
  16. Daley, J & Matthews, Kent & Whitfield, Keith, 2006. "Too-Big-To-Fail: Bank Failure and Banking Policy in Jamaica," Cardiff Economics Working Papers E2006/4, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  17. Jean-Charles Rochet, 2004. "Rebalancing the three pillars of Basel II," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 7-21. [Downloadable!]
  18. Steven Pottier & David Sommer, 2002. "The Effectiveness of Public and Private Sector Summary Risk Measures in Predicting Insurer Insolvencies," Journal of Financial Services Research, Springer, vol. 21(1), pages 101-116, February. [Downloadable!] (restricted)
  19. Rochet, Jean-Charles, 2003. "Rebalancing the 3 Pillars of Basel 2," IDEI Working Papers 224, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  20. Marc Saidenberg & Til Schuermann & May, . "The New Basel Capital Accord and Questions for Research," Center for Financial Institutions Working Papers 03-14, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  21. John Krainer & Jose A. Lopez, 2004. "Using securities market information for bank supervisory monitoring," Working Papers in Applied Economic Theory 2004-05, Federal Reserve Bank of San Francisco. [Downloadable!]
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  22. John Krainer & Jose A. Lopez, 2001. "Incorporating equity market information into supervisory monitoring models," Working Papers in Applied Economic Theory 2001-14, Federal Reserve Bank of San Francisco. [Downloadable!]
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  23. Julapa Jagtiani & James Kolari & Catharine Lemieux & Hwan Shin, 2003. "Early warning models for bank supervision: Simpler could be better," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 49-60. [Downloadable!]
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