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Predicting bank insolvencies using machine learning techniques

Anastasios Petropoulos, Vasilis Siakoulis, Evangelos Stavroulakis and Nikolaos E. Vlachogiannakis

International Journal of Forecasting, 2020, vol. 36, issue 3, 1092-1113

Abstract: Proactively monitoring and assessing the economic health of financial institutions has always been the cornerstone of supervisory authorities. In this work, we employ a series of modeling techniques to predict bank insolvencies on a sample of US-based financial institutions. Our empirical results indicate that the method of Random Forests (RF) has a superior out-of-sample and out-of-time predictive performance, with Neural Networks also performing almost equally well as RF in out-of-time samples. These conclusions are drawn not only by comparison with broadly used bank failure models, such as Logistic, but also by comparison with other advanced machine learning techniques. Furthermore, our results illustrate that in the CAMELS evaluation framework, metrics related to earnings and capital constitute the factors with higher marginal contribution to the prediction of bank failures. Finally, we assess the generalization of our model by providing a case study to a sample of major European banks.

Keywords: Bank’s insolvencies; Forecasting; Random Forests; Support Vector Machines; Neural Networks; Conditional inference trees (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ijforecast.2019.11.005

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