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Modeling ‘Early Warning System’ For Off-Site Surveillance Of Commercial Banks

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  • Amit Kulkarni

Abstract

This paper intends to develop an Early Warning System (EWS) for predicting the future capital adequacy of commercial banks. Using the financial data for Indian public sector and private sector banks, binary choice models are estimated and bank-wise probability of future capital inadequacy (one year prior to the actual outcome) is generated. Perhaps not surprisingly, a number of banking indicators are found to be good short-term predictors of capital ratios. The EWS models developed in this paper could identify capital inadequate banks with a reasonable degree of accuracy. Thus, our models could be potentially useful as effective EWS for off-site surveillance of commercial banks.

Suggested Citation

  • Amit Kulkarni, 2006. "Modeling ‘Early Warning System’ For Off-Site Surveillance Of Commercial Banks," The IUP Journal of Bank Management, IUP Publications, vol. 0(3), pages 7-26, August.
    • Handle: RePEc:icf:icfjbm:v:5:y:2006:i:3:p:7-26
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