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An early warning system for less significant Italian banks

Author

Listed:
  • Fabrizio Ferriani

    (Bank of Italy)

  • Wanda Cornacchia

    (Bank of Italy)

  • Paolo Farroni

    (Bank of Italy)

  • Eliana Ferrara

    (Bank of Italy)

  • Francesco Guarino

    (Bank of Italy)

  • Francesco Pisanti

    (Bank of Italy JEL Classification: G21, G28)

Abstract

This paper presents a statistical early warning system for less significant institutions (LSIs) under the direct supervision of the Bank of Italy. The model is calibrated on the basis of a wider definition of possible distress events, using the universe of Italian LSIs active in the period 2008-2016 as a reference. We selected an extensive list of variables that might give early warnings of a crisis in relation both to the overall banking system and Italy�s macro-financial situation, and to individual banks� performances. A logit model is used to calculate the probability of default (PD) for each bank, with time horizon estimates set at four and six quarters. The empirical specifications proposed are tested using several statistical indices; the ex-post analysis of the estimated PDs shows a percentage of correct bank classification in the range of 80-90 per cent, with better results the nearer the moment of prediction is to when a crisis situation actually occurs.

Suggested Citation

  • Fabrizio Ferriani & Wanda Cornacchia & Paolo Farroni & Eliana Ferrara & Francesco Guarino & Francesco Pisanti, 2019. "An early warning system for less significant Italian banks," Questioni di Economia e Finanza (Occasional Papers) 480, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_480_19
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    Cited by:

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    2. Filippopoulou, Chryssanthi & Galariotis, Emilios & Spyrou, Spyros, 2020. "An early warning system for predicting systemic banking crises in the Eurozone: A logit regression approach," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 344-363.
    3. Bräuning, Michael & Malikkidou, Despo & Scricco, Giorgio & Scalone, Stefano, 2019. "A new approach to Early Warning Systems for small European banks," Working Paper Series 2348, European Central Bank.
    4. Berthonnaud, Pierre & Cesati, Enrico & Drudi, Maria Ludovica & Jager, Kirsten & Kick, Heinrich & Lanciani, Marcello & Schneider, Ludwig & Schwarz, Claudia & Siakoulis, Vasileios & Vroege, Robert, 2021. "Asset encumbrance in euro area banks: analysing trends, drivers and prediction properties for individual bank crises," Occasional Paper Series 261, European Central Bank.

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    Keywords

    early warning system; default; less significant institutions; CAMELS; banking supervision;
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