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Predicting distress in European banks

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Author Info

  • Betz, Frank
  • Oprica, Silviu
  • Peltonen, Tuomas A.
  • Sarlin, Peter

Abstract

The paper develops an early-warning model for predicting vulnerabilities leading to distress in European banks using both bank and country-level data. As outright bank failures have been rare in Europe, the paper introduces a novel dataset that complements bankruptcies and defaults with state interventions and mergers in distress. The signals of the early warning model are calibrated not only according to the policy-maker’s preferences between type I and II errors, but also to take into account the potential systemic relevance of each individual financial institution. The key findings of the paper are that complementing bank specific vulnerabilities with indicators for macro-financial imbalances and banking sector vulnerabilities improves model performance and yields useful out-of-sample predictions of bank distress during the current financial crisis. JEL Classification: E44, E58, F01, F37, G01

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1597.

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Date of creation: Oct 2013
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Handle: RePEc:ecb:ecbwps:20131597

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Related research

Keywords: bank distress; early-warning model; prudential policy; signal evaluation;

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References

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Citations

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Cited by:
  1. Jan Willem van den End, 2013. "A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio," DNB Working Papers 372, Netherlands Central Bank, Research Department.
  2. David G. Mayes & Hanno Stremmel, 2014. "The Effectiveness of Capital Adequacy Measures in Predicting Bank Distress," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  3. Ramsay, Bruce A. & Sarlin, Peter, 2014. "Ending over-lending: Assessing systemic risk with debt to cash flow," Research Discussion Papers 11/2014, Bank of Finland.
  4. Peter Sarlin & Henrik J. Nyman, 2013. "Modeling public collaborative processes: The case of safeguarding financial stability," Papers 1312.7545, arXiv.org.

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