On the consistency of the Z-score to measure the bank risk

This paper explores the effects of CEE banks’ balance sheet strategies and the impact of banking reforms on their risk-taking behaviour and assesses them with respect to banks’ ownership profile. With our asymmetric Z-score and Distance to Default, we find that state-owned banks are the riskiest and foreign banks the safest institutions. Moreover, the market perceives the former as being riskier regardless of their balance sheet policies. More interbank deposits and long-term funds increase the Z-scores of these banks to a larger extent, but more income diversification has the opposite effect. As for domestic private and foreign banks, these balance sheet policies do not affect the accounting-based risk measure of these institutions. Finally, in countries and periods with banking regulations that conform to the Basel requirements to a greater degree, foreign and private banks are less risky with respect to their Z-score and this effect is stronger for foreign institutions.