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Early warning models for bank supervision: Simpler could be better

  • Julapa Jagtiani
  • James Kolari
  • Catharine Lemieux
  • Hwan Shin

Can computer-based models, using publicly available information, be used as off-site early warning systems (EWS) to identify banks that will become inadequately capitalized in the near future? The EWS models analyzed in this article are able to detect the early onset of financial distress one year in advance with a reasonable degree of accuracy. Although simple EWS models do as well as or better than more sophisticated ones, more sophisticated models could provide detailed information about individual bank strengths and weaknesses.

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Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2003)
Issue (Month): Q III ()
Pages: 49-60

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Handle: RePEc:fip:fedhep:y:2003:i:qiii:p:49-60:n:v.27no.3
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  1. Rebel Cole & Jeffery Gunther, 1998. "Predicting Bank Failures: A Comparison of On- and Off-Site Monitoring Systems," Journal of Financial Services Research, Springer, vol. 13(2), pages 103-117, April.
  2. David C. Wheelock & Paul W. Wilson, 1995. "Why do banks disappear? The determinants of U.S. bank failures and acquisitions," Working Papers 1995-013, Federal Reserve Bank of St. Louis.
  3. Gary Whalen, 1991. "A proportional hazards model of bank failure: an examination of its usefulness as an early warning tool," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 21-31.
  4. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, vol. 54(4), pages 361-387.
  5. Jeffery W. Gunther & Robert R. Moore, 2000. "Early warning models in real time," Financial Industry Studies Working Paper 00-01, Federal Reserve Bank of Dallas.
  6. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 1999. "The role of supervisory screens and econometric models in off-site surveillance," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 31-56.
  7. John Krainer & Jose A. Lopez, 2003. "Using equity market information to monitor banking institutions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan24.
  8. Rebel A. Cole & Jeffery W. Gunther, 1995. "FIMS: a new monitoring system for banking institutions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-15.
  9. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
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