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Contribution of macroeconomic factors to the prediction of small bank failures

Davide Salvatore Mare ()

Journal of International Financial Markets, Institutions and Money, 2015, vol. 39, issue C, 25-39

Abstract: Microprudential regulation is an integral part of any banking supervisory framework. By analysing the link between economic conditions and the survival of small co-operative banks, this study sheds light on the importance of the economic environment after assessing individual bank stability over time. The results show that bank failure is better captured when we account for the state of the economy both at the national and the regional level. Moreover, voluntary closures and acquisitions across provinces appear to be related with bank distress. Our findings have important policy implications. First, using a wider spectrum of information increases the accuracy of default prediction models, improving the supervisory toolbox used to monitor the health of small banks. Second, economic downturns increase a co-operative bank's default risk, supporting the introduction of countercyclical capital buffers to lessen the negative effects associated to bank instability.

Keywords: Bank failure; Probability of default; Survival model; Macroeconomic factors; Italian co-operative banks (search for similar items in EconPapers)
JEL-codes: C23 C41 G21 G28 G33 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.intfin.2015.05.005

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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