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Forecasting the Fragility of the Banking and Insurance Sector

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  • Kerstin Bernoth
  • Andreas Pick

Abstract

This paper considers the issue of forecasting financial fragility of banks and insurances using a panel data set of performance indicators, namely distance-to- default, taking unobserved common factors into account. We show that common factors are important in the performance of banks and insurances, analyze the influences of a number of observable factors on banking and insurance performance, and evaluate the forecasts from our model. We find that taking unobserved common factors into account reduces the the root mean square forecasts error of firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based only on observed variables. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.97596.de/dp882.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 882.

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Length: 27 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diwwpp:dp882

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Keywords: Financial stability; financial linkages; banking; insurances; unobserved common factors; forecasting;

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Cited by:
  1. Wenzel, Lars & Wolf, André, 2013. "Short-term forecasting with business surveys: Evidence for German IHK data at federal state level," HWWI Research Papers 140, Hamburg Institute of International Economics (HWWI).
  2. M. Kabir Hassan & William J. Hippler III, 2013. "The Pronounced Impact of Macroeconomic Stress on the Financial Sector: Implications for Real Sector Growth," NFI Working Papers 2013-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
  3. Martín Saldías, 2011. "Sectoral credit risk in the euro area," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  4. Saldías, Martín, 2013. "A market-based approach to sector risk determinants and transmission in the euro area," Working Paper Series 1574, European Central Bank.
  5. Vallascas, Francesco & Keasey, Kevin, 2012. "Bank resilience to systemic shocks and the stability of banking systems: Small is beautiful," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1745-1776.

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