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Forecasting Bank Leverage

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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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp320.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 320.

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Length: 34
Date of creation: 01 Dec 2012
Date of revision:
Handle: RePEc:uts:rpaper:320
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  1. Rebel A. Cole & Jeffery W. Gunther, 1995. "FIMS: a new monitoring system for banking institutions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-15.
  2. Cole, Rebel A. & White, Lawrence J., 2010. "Déjà vu all over again: The causes of U.S. commercial bank failures this time around," MPRA Paper 24690, University Library of Munich, Germany, revised 28 Jul 2010.
  3. Martin, Daniel, 1977. "Early warning of bank failure : A logit regression approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 249-276, November.
  4. Espahbodi, Pouran, 1991. "Identification of problem banks and binary choice models," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 53-71, February.
  5. Xavier Sala-i-Martin, 1995. "The classical approach to convergence analysis," Economics Working Papers 117, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
  7. 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.).
  8. Julapa Jagtiani & James Kolari & Catharine Lemieux & Hwan Shin, 2003. "Early warning models for bank supervision: Simpler could be better," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 49-60.
  9. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, vol. 54(4), pages 361-387.
  10. Shaffer, Sherrill, 2012. "Bank failure risk: Different now?," Economics Letters, Elsevier, vol. 116(3), pages 613-616.
  11. DeYoung, Robert & Hasan, Iftekhar, 1998. "The performance of de novo commercial banks: A profit efficiency approach," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 565-587, May.
  12. DeYoung, Robert, 2003. " De Novo Bank Exit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 711-28, October.
  13. Meyer, Paul A & Pifer, Howard W, 1970. "Prediction of Bank Failures," Journal of Finance, American Finance Association, vol. 25(4), pages 853-68, September.
  14. David C. Wheelock & Paul W. Wilson, 2000. "Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 127-138, February.
  15. de Haan, Jakob & Poghosyan, Tigran, 2012. "Size and earnings volatility of US bank holding companies," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3008-3016.
  16. Arena, Marco, 2008. "Bank failures and bank fundamentals: A comparative analysis of Latin America and East Asia during the nineties using bank-level data," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 299-310, February.
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