An Early Warning Model for EU banks with Detection of the Adverse Selection Effect
AbstractWe estimate an early warning model of banks’ failure using a panel of 82 EU banks observed between 1991 and 2005. We make two contributions to the literature. Firstly, we construct a distance-to-default indicator and test its predictive power. The tests implemented here are very similar to those realized by Gropp, Vesala and Vulpes (2005), but our time dimension is four years longer and we use a more restrictive definition of banks’ “failure”. This first part of the paper establishes the accuracy of our data and confirms the robustness of distance-to-default as an early indicator of EU banks’ fragility. Our second advance consists in introducing a variable detecting the adverse selection problem that can be caused by rapid growth strategies. A measure of past average growth of assets is shown to be a very significant and powerful predictor of future banks’ difficulties. We discuss the origins and implications of such an effect.
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Bibliographic InfoPaper provided by Groupement de Recherches Economiques et Sociales in its series Cahiers du GRES with number 2007-08.
Date of creation: 2007
Date of revision:
failures; early warning systems; CAMEL ratings; distance to default;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-09 (All new papers)
- NEP-BAN-2007-04-09 (Banking)
- NEP-EEC-2007-04-09 (European Economics)
- NEP-FOR-2007-04-09 (Forecasting)
- NEP-MAC-2007-04-09 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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