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Forecasting Bank Leverage

  • Gerhard Hambusch
  • Sherrill Shaffer

Standard early warning models to predict bank failures cannot be estimated during periods of few or zero failures, precluding any updating of such models during times of good performance. Here we address this problem using an alternative approach, forecasting the simple leverage ratio (equity/assets) as a continuous variable that does not suffer from the small sample problem. Out-of-sample performance shows some promise as a supplement to the standard approach, despite measurable deterioration in prediction accuracy during the crisis years.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-56.

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Length: 36 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:een:camaaa:2012-56
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  1. Rebel A. Cole & Jeffery W. Gunther, 1993. "Separating the likelihood and timing of bank failure," Finance and Economics Discussion Series 93-20, Board of Governors of the Federal Reserve System (U.S.).
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  13. Shaffer, Sherrill, 2012. "Bank failure risk: Different now?," Economics Letters, Elsevier, vol. 116(3), pages 613-616.
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