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Coordinated failure? a cross-country bank failure prediction model

Author

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  • Santoso, Wimboh
  • Montgomery, Heather
  • Besar, Dwityapoetra
  • Hanh, Tran

Abstract

This paper empirically investigates the causes of bank failures in Japan and Indonesia. Using logistic regression analysis of financial ratios, we explore the usefulness of domestic bank failure prediction models with a cross-country model that allows for cross-correlation of the error terms. Our results suggest that loans, both as a ratio to total assets, deposits and in some cases the ratio of non-performing loans, are the most significant predictors of bank failure in both Japan and Indonesia. Regulatory capital ratios, on the contrary, do not seem to be significant indicators of failure. In addition to the domestic models, we explore the usefulness of a cross-country model of bank failure prediction and find that this model outperforms the domestic models on several diagnostic tests.

Suggested Citation

  • Santoso, Wimboh & Montgomery, Heather & Besar, Dwityapoetra & Hanh, Tran, 2005. "Coordinated failure? a cross-country bank failure prediction model," MPRA Paper 33144, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33144
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    File URL: https://mpra.ub.uni-muenchen.de/33144/1/MPRA_paper_33144.pdf
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    References listed on IDEAS

    as
    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    3. Martin, Daniel, 1977. "Early warning of bank failure : A logit regression approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 249-276, November.
    4. Beaver, Wh, 1968. "Market Prices, Financial Ratios, And Prediction Of Failure," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 179-192.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Luminita Gabriela ISTRATE & Bogdan Stefan IONESCU & Maria-Monica HARALAMBIE, 2016. "Aspects of the impact of interest rate development on the probability of default," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 14(142), pages 1149-1149, October.
    2. M. Mete Doğanay & Nildağ Başak Ceylan & Ramazan Aktaş, 2006. "Predicting Financial Failure Of The Turkish Banks," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-19.

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    More about this item

    Keywords

    Bankruptcy; logistic regression; early warning; logit; bank failure; bank crisis;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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