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Forecasting Bank Failure : A Non-Parametric Frontier Estimation Approach

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  • Richard S. BARR

    (Southern Methodist University)

  • Lawrence M. SEIFORD

    (University of Massachusetts)

  • Thomas F. SIEMS

    (Federal Reserve Bank of Dallas)

Abstract

The dramatic rise in bank failures over the last decade has led to a search for leading indicators so that costly bailouts might be avoided. While the quality of a bank's management is generally acknowledged to be a key contributor to institutional collapse, it is usually excluded from early-warning models for lack of a metric. This paper describes a new approach for quantifying a bank's managerial efficiency, using a data- envelopment-analysis model that combines multiple inputs and outputs to compute a scalar measure of efficiency. This new metric captures an elusive, yet crucial, element of institutional success: management quality. New failure-prediction models for detecting a bank's troubled status which incorporate this explanatory variable have proven to be robust and accurate, as verified by in-depth empirical evaluations, cost sensitivity analyses, and comparisons with other published approaches

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 1994041.

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Length: 14
Date of creation: 01 Dec 1994
Date of revision:
Handle: RePEc:ctl:louvre:1994041

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Cited by:
  1. Jiri Podpiera & Laurent Weill, 2007. "Bad Luck or Bad Management? Emerging Banking Market Experience," Working Papers 2007/5, Czech National Bank, Research Department.
  2. Grigorian, David A. & Manole, Vlad, 2002. "Determinants of commercial bank performance in transition - an application of data envelopment analysis," Policy Research Working Paper Series 2850, The World Bank.
  3. Chen, Yu-Chuan & Chiu, Yung-Ho & Huang, Chin-Wei & Tu, Chien Heng, 2013. "The analysis of bank business performance and market risk—Applying Fuzzy DEA," Economic Modelling, Elsevier, vol. 32(C), pages 225-232.
  4. Robert A. Eisenbeis & Gary D. Ferrier & Simon H. Kwan, 1999. "The informativeness of stochastic frontier and programming frontier efficiency scores: Cost efficiency and other measures of bank holding company performance," Working Paper 99-23, Federal Reserve Bank of Atlanta.
  5. Jacob A. Bikker, 2001. "Efficiency in the European banking industry: an exploratory analysis to rank contries," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 17.
  6. Isik, Ihsan & Hassan, M. Kabir, 2003. "Financial disruption and bank productivity: The 1994 experience of Turkish banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 291-320.
  7. Brockett, P. L. & Charnes, A. & Cooper, W. W. & Huang, Z. M. & Sun, D. B., 1997. "Data transformations in DEA cone ratio envelopment approaches for monitoring bank performances," European Journal of Operational Research, Elsevier, vol. 98(2), pages 250-268, April.
  8. Christophe Godlewski, 2004. "Modélisation de la Prévision de Défaillance Bancaire et Facteurs Réglementaires Une Application aux Banques des Pays Emergents," Finance 0409027, EconWPA.
  9. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of Financial Institutions: International Survey and Directions for Future Research," Center for Financial Institutions Working Papers 97-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  10. Christophe Godlewski, 2004. "Modélisation de la Prévision de Défaillance Bancaire Une Application aux Banques des Pays Emergents," Finance 0409026, EconWPA.
  11. Greg Gregoriou & Fabrice Rouah & Stephen Satchell & Fernando Diz, 2005. "Simple and cross efficiency of CTAs using data envelopment analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 11(5), pages 393-409.
  12. Anton Belgrave & Kester Guy & Mahalia Jackman, 2012. "Industry Specific Shocks and Non-Performing Loans in Barbados," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 4(2), pages 123-133, December.
  13. Fitzpatrick, Trevor & McQuinn, Kieran, 2004. "Cost Efficiency in UK and Irish Credit Institutions," Research Technical Papers 3/RT/04, Central Bank of Ireland.
  14. Chiu, Yung-Ho & Chen, Yu-Chuan, 2009. "The analysis of Taiwanese bank efficiency: Incorporating both external environment risk and internal risk," Economic Modelling, Elsevier, vol. 26(2), pages 456-463, March.
  15. Pires Gonçalves, Ricardo, 2006. "Management Quality Measurement: Using Data Envelopment Analysis (DEA) Estimation Approach for Banks in Brazil," MPRA Paper 11143, University Library of Munich, Germany.
  16. Kao, Chiang & Liu, Shiang-Tai, 2004. "Predicting bank performance with financial forecasts: A case of Taiwan commercial banks," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2353-2368, October.
  17. González Bravo, M. Isabel & Mariaca Daza, René, 2010. "Fracaso de bancos comerciales. Un estudio de eficiencia y productividad," Revista Latinoamericana de Desarrollo Economico, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana, issue 13, pages 137-162.

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