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Estimating bank default with generalised extreme value models

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  • Raffaella Calabrese

    (Department of Quantitative Methods for Economics and Business Sciences, University of Milano-Bicocca)

  • Paolo Giudici

    ()
    (Department of Economics and Management, University of Pavia)

Abstract

This 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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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0035.pdf
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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 035.

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Length: 18 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:pav:demwpp:035

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  1. Paola Bongini & Stijn Claessens & Giovanni Ferri, 2001. "The Political Economy of Distress in East Asian Financial Institutions," Journal of Financial Services Research, Springer, vol. 19(1), pages 5-25, February.
  2. Adam B. Ashcraft, 2004. "Are bank holding companies a source of strength to their banking subsidiaries?," Staff Reports 189, Federal Reserve Bank of New York.
  3. Marco Arena, 2005. "Bank Failures and Bank Fundamentals: A Comparative Analysis of Latin America and East Asia during the Nineties using Bank-Level Data," Working Papers 05-19, Bank of Canada.
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