Predicting distress in European banks
Tuomas Peltonen () and
Peter Sarlin ()
Journal of Banking & Finance, 2014, vol. 45, issue C, 225-241
The paper develops an early-warning model for predicting vulnerabilities leading to distress in European banks using both bank and country-level data. As outright bank failures have been rare in Europe, the paper introduces a novel dataset that complements bankruptcies and defaults with state interventions and mergers in distress. The signals of the early-warning model are calibrated not only according to the policymaker’s preferences between type I and II errors, but also to take into account the potential systemic relevance of each individual financial institution. The key findings of the paper are that complementing bank-specific vulnerabilities with indicators for macro-financial imbalances and banking sector vulnerabilities improves model performance and yields useful out-of-sample predictions of bank distress during the current financial crisis.
Keywords: Bank distress; Early-warning model; Prudential policy; Signal evaluation (search for similar items in EconPapers)
JEL-codes: E44 E58 F01 F37 G01 (search for similar items in EconPapers)
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Working Paper: Predicting distress in European banks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:45:y:2014:i:c:p:225-241
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