Estimating bank default with generalised extreme value models
AbstractThis paper considers the joint role of macroeconomic and bankspecific factors in explaining the occurrence of bank failures. As bank failures are, fortunately, rare, we apply a regression model, based on extreme value theory, that turns out to be more effective than classical logistic regression models. The application of this model to the occurrence of bank defaults in Italy shows that, while capital ratios considered by the regulatory requirements of Basel III are extremely significant to explain proper failures, macroeconomic conditions are relevant only when failures are defined also in terms of merger and acquisition. We also apply the joint beta regression model, in order to estimate the factors that most contribute to the bank capital ratios monitored by Basel III. Our results show that the Tier 1 capital ratio and the Total capital ratio are affected by similar variables, at the micro and macroeconomic level. An important outcome of this part of the analysis is that capital ratio variables can be taken as reasonable proxies of distress, at least as far as the effect sign of the determinants of failure risk is being considered.
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Bibliographic InfoPaper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 035.
Length: 18 pages
Date of creation: Mar 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-16 (All new papers)
- NEP-BAN-2013-03-16 (Banking)
- NEP-CBA-2013-03-16 (Central Banking)
- NEP-RMG-2013-03-16 (Risk Management)
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