Using The Artificial Neural Network (ANN) to Assess Bank Credit Risk: A Case Study of Indonesia
AbstractEver since the Asian Financial Crisis, concerns have risen over whether policy-makers have sufficient tools to maintain financial stability. The ability to predict financial disturbances enables the authorities to take precautionary action to minimize their impact. In this context, the authorities may use any financial indicators which may accurately predict shifts in the quality of bank exposures. This paper uses key macro-economic variables (i.e. GDP growth, the inflation rate, stock prices, the exchange rates, and money in circulation) to predict the default rate of the Indonesian Islamic banks’ exposures. The default rates are forecasted using the Artificial Neural Network (ANN) methodology, which incorporates the Bayesian Regularization technique. From the sensitivity analysis, it is shown that stock prices could be used as a leading indicator of future problem.
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Bibliographic InfoPaper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2008_06.
Date of creation: Jul 2008
Date of revision: Jul 2008
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More information through EDIRC
default risk; artificial neural network; Bayesian regularization; transition matrix.;
Find related papers by JEL classification:
- E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-29 (All new papers)
- NEP-CMP-2008-09-29 (Computational Economics)
- NEP-FMK-2008-09-29 (Financial Markets)
- NEP-MAC-2008-09-29 (Macroeconomics)
- NEP-RMG-2008-09-29 (Risk Management)
- NEP-SEA-2008-09-29 (South East Asia)
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.:
- Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
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