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Estimating probabilities of default for German savings banks and credit cooperatives

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  • Daniel Porath
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    Abstract

    Savings banks and cooperative banks are important players in the German financial market. However, we know very little about their default risk, because these banks usually resolve financial distress within their own organizations, which means that outsiders cannot observe defaults. In this paper I use a new dataset that contains information about financial distress and financial strength of all German savings banks and cooperative banks. The Deutsche Bundesbank has gathered the data for microprudential supervision. Thus, the data have never before been exploited for statistical risk assessment. I use the data to identify the main drivers of savings banks’ and cooperative banks’ risk and to detect structural differences between the two groups. To do so, I estimate a default prediction model. I also analyze the impact of macroeconomic information for forecasting banks’ defaults. Recent findings for the U.S. have cast some doubt on the usefulness of macroeconomic information for banks’ risk assessment. Contrary to recent literature, I find that macroeconomic information significantly improves default forecasts.

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    Bibliographic Info

    Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

    Volume (Year): 58 (2006)
    Issue (Month): 3 (July)
    Pages: 214-233

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    Handle: RePEc:sbr:abstra:v:58:y:2006:i:3:p:214-233

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    Related research

    Keywords: Bank Failure; Default Probability; Panel Binary Response Analysis;

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    Cited by:
    1. De Graeve, F. & Kick, T. & Koetter, M., 2008. "Monetary policy and financial (in)stability: An integrated micro-macro approach," Journal of Financial Stability, Elsevier, vol. 4(3), pages 205-231, September.
    2. Kick, Thomas & Pfingsten, Andreas, 2011. "The importance of qualitative risk assessment in banking supervision before and during the crisis," Discussion Paper Series 2: Banking and Financial Studies 2011,09, Deutsche Bundesbank, Research Centre.
    3. 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.
    4. Bos, J.W.B. & Koetter, M. & Kolari, J.W. & Kool, C.J.M., 2009. "Effects of heterogeneity on bank efficiency scores," European Journal of Operational Research, Elsevier, vol. 195(1), pages 251-261, May.
    5. Koetter, Michael & Kick, Thomas, 2007. "Slippery slopes of stress: ordered failure events in German banking," Discussion Paper Series 2: Banking and Financial Studies 2007,03, Deutsche Bundesbank, Research Centre.
    6. Koetter, Michael & Poghosyan, Tigran, 2008. "The implications of latent technology regimes for competition and efficiency in banking," Discussion Paper Series 2: Banking and Financial Studies 2008,15, Deutsche Bundesbank, Research Centre.
    7. Maghyereh, Aktham I. & Awartani, Basel, 2014. "Bank distress prediction: Empirical evidence from the Gulf Cooperation Council countries," Research in International Business and Finance, Elsevier, vol. 30(C), pages 126-147.
    8. Stolz, Stéphanie & Wedow, Michael, 2011. "Banks' regulatory capital buffer and the business cycle: Evidence for Germany," Journal of Financial Stability, Elsevier, vol. 7(2), pages 98-110, June.
    9. Koetter, M. & Bos, J.W.B. & Heid, F. & Kolari, J.W. & Kool, C.J.M. & Porath, D., 2007. "Accounting for distress in bank mergers," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3200-3217, October.
    10. Ehab Zaki & Rahim Bah & Ananth Rao, 2011. "Assessing probabilities of financial distress of banks in UAE," International Journal of Managerial Finance, Emerald Group Publishing, vol. 7(3), pages 304-320, June.
    11. Kick, Thomas & Prieto, Esteban, 2013. "Bank risk taking and competition: Evidence from regional banking markets," Discussion Papers 30/2013, Deutsche Bundesbank, Research Centre.
    12. Koetter, Michael, 2013. "Market structure and competition in German banking: Modules I and IV," Working Papers 06/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    13. Koetter, Michael, 2006. "The stability of efficiency rankings when risk-preferences and objectives are different," Discussion Paper Series 2: Banking and Financial Studies 2006,08, Deutsche Bundesbank, Research Centre.
    14. Massimo Libertucci & Francesco Piersante, 2012. "Start-up banks’ default and the role of capital," Temi di discussione (Economic working papers) 890, Bank of Italy, Economic Research and International Relations Area.
    15. Ruprecht, Benedikt & Entrop, Oliver & Kick, Thomas & Wilkens, Marco, 2013. "Market timing, maturity mismatch, and risk management: Evidence from the banking industry," Discussion Papers 56/2013, Deutsche Bundesbank, Research Centre.

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