Early Warning Models for Banking Supervision in Romania
In this paper we propose an early warning system for the Romanian banking sector, as an addition to the standardized CAAMPL rating system used by the National Bank of Romania for assessing the local credit institutions. We aim to find the determinants for downgrades as well as for a bank to have a weak overall position, to estimate the respective probabilities and to be able to perform rating predictions. Having this purpose, we build two models with binary dependent variables and one ordered logistic model that accounts for all possible future ratings. One result is that indicators for current position, market share, profitability and assets quality determine rating downgrades, whereas capital adequacy, liquidity and macroeconomic environment are not represented in the model. Banks that will have a weak overall position in one year can be predicted using also indicators for current position, market share, profitability and assets quality, as well as, in this case, capital adequacy and macroeconomic environment, the latter only for the binary dependent variable model, leaving liquidity indicators out again. Based on the ordered logistic model’s capacity for rating prediction, we estimated one year horizon scores and ratings for each bank and we aggregated these results for predicting a measure of assessing the local banking sector as a whole.
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