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Distress in European Banks

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  • Tigran Poghosyan
  • Martin Cihák

Abstract

The global financial crisis has highlighted the importance of early identification of weak banks: when problems are identified late, solutions are much more costly. Until recently, Europe has seen only a small number of outright bank failures, which made the estimation of early warning models for bank supervision very difficult. This paper presents a unique database of individual bank distress across the European Union from mid-1990s to 2008. Using this data set, we analyze the causes of banking distress in Europe. We identify a set of indicators and thresholds that can help to distinguish sound banks from those vulnerable to financial distress.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/9.

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Length: 39
Date of creation: 01 Jan 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/9

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Keywords: European Union; Banks; Bank soundness; Bank supervision; Financial stability; Databases; Forecasting models; Data analysis; banking; bank distress; early warning system; bank failure; contagion; bank failures; early warning systems; banking supervision; banking crises; capital adequacy; financial distress; banking assets; deposit insurance; financial indicators; banking distress; banking system; rating agencies; financial integration; systemic banking crises; crisis management; banking institution; banking market; financial information; bank runs; federal deposit insurance; bank assets; banking sectors; distressed bank; bank risk; bank liquidity; recapitalization; financial crisis; bank stock; banking markets; banking structures; bank mergers; bank capitalization; bank crisis; global financial crisis; bank depositors; banking institutions; bank holding companies; subordinated debt; deposit guarantee; risk profile analysis; sound bank management; capital requirement; banking system fragility; bank risk-taking; banking risk; bank of spain; small bank; crisis resolution; deposit guarantee schemes; financial deepening; bank failure rates; bank fragility; loan loss provision; bank liabilities; bank stock prices; crisis prevention; internal control; bank holding; deposit protection; income statement; bank management; probability model; banking industry; bank balance sheets; banking sector; asset diversification; banking risks; bank loans; bank earnings; bank stocks; bank exposures; return on assets; bank credit; bank data; financial strength; prudential bank supervision; savings bank; capital regulation; currency crises;

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References

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  1. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  2. Robert A. Eisenbeis & George G. Kaufman, 2005. "Bank crisis resolution and foreign-owned banks," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 1-18.
  3. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
  4. Martin, Daniel, 1977. "Early warning of bank failure : A logit regression approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 249-276, November.
  5. Martin Cihák & Jörg Decressin, 2007. "The Case for a European Banking Charter," IMF Working Papers 07/173, International Monetary Fund.
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  7. Brenda González-Hermosillo & Ceyla Pazarbaşioğlu & Robert Billings, 1997. "Determinants of Banking System Fragility: A Case Study of Mexico," IMF Staff Papers, Palgrave Macmillan, vol. 44(3), pages 295-314, September.
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  9. Martin Cihák & Alexander F. Tieman, 2008. "Quality of Financial Sector Regulation and Supervision Around the World," IMF Working Papers 08/190, International Monetary Fund.
  10. Kick, Thomas & Koetter, Michael, 2007. "Slippery slopes of stress: Ordered failure events in German banking," Journal of Financial Stability, Elsevier, vol. 3(2), pages 132-148, July.
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  12. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems," IMF Working Papers 04/52, International Monetary Fund.
  13. Martin CIHAK, 2007. "Systemic Loss: A Measure of Financial Stability (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 5-26, March.
  14. Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1699-1707, August.
  15. Koetter, Michael & Bos, Jaap W. B. & Heid, Frank & Kool, Clemens J. M. & Kolari, James W. & Porath, Daniel, 2005. "Accounting for distress in bank mergers," Discussion Paper Series 2: Banking and Financial Studies 2005,09, Deutsche Bundesbank, Research Centre.
  16. Heider, Florian & Gropp, Reint Eberhard, 2008. "The Determinants of Capital Structure: Some Evidence from Banks," ZEW Discussion Papers 08-015, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  17. Charles W. Calomiris & Joseph R. Mason, 2001. "Causes of U.S. bank distress during the depression," Proceedings 714, Federal Reserve Bank of Chicago.
  18. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, vol. 2(4), pages 312-336, March.
  19. Thomas B. King & Daniel A. Nuxoll & Timothy J. Yeager, 2006. "Are the causes of bank distress changing? can researchers keep up?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 57-80.
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Citations

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Cited by:
  1. Albulescu Claudiu Tiberiu & Coroiu Sorina Ioana, 2009. "Early Warning System For The Romanian Banking Sector: The Caampl Approach," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 3(1), pages 458-466, May.
  2. Radu Muntean, 2009. "Early Warning Models for Banking Supervision in Romania," Advances in Economic and Financial Research - DOFIN Working Paper Series 39, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
  3. Amidu, Mohammed, 2013. "The effects of the structure of banking market and funding strategy on risk and return," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 143-155.
  4. Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2013. "Policy in adaptive financial markets—the use of systemic risk early warning tools," Working Paper 1309, Federal Reserve Bank of Cleveland.
  5. 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.
  6. Rose, Andrew & Wieladek, Tomasz, 2012. "Too big to fail: some empirical evidence on the causes and consequences of public banking interventions in the United Kingdom," Bank of England working papers 460, Bank of England.
  7. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers 158, Bank of Greece.
  8. Jiri Podpiera & Inci Ötker, 2010. "The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions," IMF Working Papers 10/153, International Monetary Fund.
  9. Benjamin Neudorfer & Michael Sigmund & Alexander Trachta, 2011. "Detecting Financial Stability Vulnerabilities in Due Time: Can Simple Indicators Identify a Complex Issue?," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 22, pages 59-71.
  10. Tao Sun, 2011. "Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-Financial Linkages Framework," IMF Working Papers 11/111, International Monetary Fund.
  11. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2010. "Deriving the term structure of banking crisis risk with a compound option approach: The case of Kazakhstan," Discussion Paper Series 2: Banking and Financial Studies 2010,01, Deutsche Bundesbank, Research Centre.
  12. Martin Cihák & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund.

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