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Predicting Bank CAMELS and S&P Ratings: The Case of the Czech Republic

Listed author(s):
  • Alexis Derviz
  • JiÅí Podpiera

This paper investigates the determinants of the movements in the capital-assets-management-earnings-liquidity-sensitivity to market risk (CAMELS) and the longterm Standard & Poors (S&P) bank ratings in the Czech Republic during the periods when the three largest banks, representing approximately 60 percent of the Czech banking sector's total assets, were first privatized (1998-2001) and then had sufficient time to operate under new owners (2002-2005). The same list of explanatory variables employed by the Czech National Bank's banking sector regulators, corresponding to the inputs of the CAMELS rating, are examined for both ratings to select their significant predictors. We employ an ordered-response logit model to analyze the long-run S&P rating and a standard panel data framework for the CAMELS rating. We find significant explanatory power for capital adequacy, funding spread, the ratio of total loans to total assets, the value-at-risk for total assets, and leverage.

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Article provided by Taylor & Francis Journals in its journal Emerging Markets Finance and Trade.

Volume (Year): 44 (2008)
Issue (Month): 1 (January)
Pages: 117-130

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Handle: RePEc:mes:emfitr:v:44:y:2008:i:1:p:117-130
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  1. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2006. "Equity and Bond Market Signals as Leading Indicators of Bank Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 399-428, March.
  2. Kadri Männasoo & David G. Mayes, 2006. "Investigating the Early Signals of Banking Sector Vulnerabilities in Central and East European Emerging Markets," Chapters,in: Financial Development, Integration and Stability, chapter 21 Edward Elgar Publishing.
  3. Alexis Derviz & Narcisa Kadlcakova, 2001. "Methodological Problems of Quantitative Credit Risk Modeling in the Czech Economy," Archive of Monetary Policy Division Working Papers 2001/39, Czech National Bank.
  4. Rebel Cole & Jeffery Gunther, 1998. "Predicting Bank Failures: A Comparison of On- and Off-Site Monitoring Systems," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(2), pages 103-117, April.
  5. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
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