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A Dual Early Warning Model of Bank Distress

Nikolaos Papanikolaou ()

No BAFES11, BAFES Working Papers from Department of Accounting, Finance & Economic, Bournemouth University

Abstract: We contribute to the better understanding of the key factors related to the operation of the banking system that led to the global financial crisis through the development of a dual earning warning model that explores the joint determination of the probability of a distressed bank to face a licence withdrawal or to be bailed out. The underlying patterns of distress are analysed based upon a wide spectrum of bank-specific and environmental factors. We obtain precise parameter estimates and superior in- and out-of-sample forecasts. Our results show that the determinants of failures and those of bailouts differ to a considerable extent, revealing that authorities treat a distressed bank differently in their decision to let it fail or to bail it out. Overall, we provide a reliable mechanism for preventing welfare losses due to bank distress.

Keywords: financial crisis; bank distress; early warning model; forecasting power (search for similar items in EconPapers)
JEL-codes: C24 C53 G01 G21 G28 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2017-11
New Economics Papers: this item is included in nep-ban and nep-rmg
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