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Forecasting Bank Failure : A Non-Parametric Frontier Estimation Approach

Listed author(s):
  • Richard S. BARR

    (Southern Methodist University)

  • Lawrence M. SEIFORD

    (University of Massachusetts)

  • Thomas F. SIEMS

    (Federal Reserve Bank of Dallas)

The dramatic rise in bank failures over the last decade has led to a search for leading indicators so that costly bailouts might be avoided. While the quality of a bank's management is generally acknowledged to be a key contributor to institutional collapse, it is usually excluded from early-warning models for lack of a metric. This paper describes a new approach for quantifying a bank's managerial efficiency, using a data- envelopment-analysis model that combines multiple inputs and outputs to compute a scalar measure of efficiency. This new metric captures an elusive, yet crucial, element of institutional success: management quality. New failure-prediction models for detecting a bank's troubled status which incorporate this explanatory variable have proven to be robust and accurate, as verified by in-depth empirical evaluations, cost sensitivity analyses, and comparisons with other published approaches

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 1994041.

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Length: 14
Date of creation: 01 Dec 1994
Handle: RePEc:ctl:louvre:1994041
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