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Forecasting bank leverage: an alternative to regulatory early warning models

Author

Listed:
  • Gerhard Hambusch

    () (University of Technology Sydney
    Australian National University
    University of Technology Sydney)

  • Sherrill Shaffer

    () (Australian National University
    University of Wyoming)

Abstract

Abstract Bank regulators have worked to develop statistical models predicting bank failures, but such models cannot be estimated during periods of few failures. We address this problem using an alternative approach, forecasting the leverage ratio as a continuous variable that avoids the small sample problem. The leverage ratio is a natural choice in this setting both because of its historically consistent ability to predict failures and because of regulators’ primary focus on bank capitalization. Our model selection draws on both the earlier literature and more recent stress-testing studies. Out-of-sample performance shows promise as a supplement to the standard approach.

Suggested Citation

  • Gerhard Hambusch & Sherrill Shaffer, 2016. "Forecasting bank leverage: an alternative to regulatory early warning models," Journal of Regulatory Economics, Springer, vol. 50(1), pages 38-69, August.
  • Handle: RePEc:kap:regeco:v:50:y:2016:i:1:d:10.1007_s11149-016-9306-6
    DOI: 10.1007/s11149-016-9306-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank leverage; Early warning; Forecasting; Bank supervision;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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