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Achieving a balance between the avoidance of banking problems and their resolution—can financial cycle dynamics predict bank distress?

Giannoula Karamichailidou, David Mayes and Hanno Stremmel
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Giannoula Karamichailidou: University of Auckland
Hanno Stremmel: WHC – Otto Beisheim School of Management

Journal of Banking Regulation, 2018, vol. 19, issue 1, 18-32

Abstract: Abstract The global financial crisis has emphasised the importance of the financial cycle in contributing to bank failures. In this paper, we consider how far it is possible to anticipate problems in banks by using early warning indicators available from published information on the financial cycle in the economy. We use a traditional z-score model that incorporates bank-specific, banking structure and macroeconomic variables to which we add financial cycle indicators. We test these models on an unbalanced panel of 2239 European banks over the period 1999–2014. We find that the financial cycle adds noticeably to the ability to predict bank distress up to 2 years into the future.

Keywords: Early warning systems; Bank failures; Financial crises (search for similar items in EconPapers)
Date: 2018
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