The Z-score is dead, long live the Z-score! A new way to measure bank risk

Ion Lapteacru ()

Working Papers from HAL

Abstract: This paper raises questions about the consistency of the Z-score, which is the most applied accounting-based measure of bank risk. In spite of its main advantage, namely the concept of risk on which it relies, the traditional formula is precisely inconsistent with this concept. The Z-score is deduced from the probability that bank's losses exceed its capital, but under the very unrealistic assumption of normally distributed returns on assets. Consequently, we propose a structural approach to determine this bank risk measure. It consists to define the default event when banks' profit is lower than a default threshold level, which is based on the balance-sheet structure of banks and on new prudential regulation requirements.

Keywords: Z-score; Bank risk; Banking (search for similar items in EconPapers)
Date: 2017-05-05
New Economics Papers: this item is included in nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-01518652
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://hal.science/hal-01518652/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01518652

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().