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Forecasting Bank Failure: A Non-Parametric Frontier Estimation Approach

Richard S. Barr, Lawrence Seiford and Thomas Siems
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Richard S. Barr: Southern Methodist University

No 1994041, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: The dramatic rise in bank failures over the last decade has led to a search for leading indicators so that costly bailouts might be avoided. While the quality of a bank's management is generally acknowledged to be a key contributor to institutional collapse, it is usually excluded from early-warning models for lack of a metric. This paper describes a new approach for quantifying a bank's managerial efficiency, using a data- envelopment-analysis model that combines multiple inputs and outputs to compute a scalar measure of efficiency. This new metric captures an elusive, yet crucial, element of institutional success: management quality. New failure-prediction models for detecting a bank's troubled status which incorporate this explanatory variable have proven to be robust and accurate, as verified by in-depth empirical evaluations, cost sensitivity analyses, and comparisons with other published approaches

JEL-codes: D24 D69 J21 (search for similar items in EconPapers)
Date: 1994-12-01
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