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Bank insolvency risk and Z-score measures: caveats and best practice

Vincent Bouvatier (), Laetitia Lepetit (), Pierre-Nicolas Rehault () and Frank Strobel
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Vincent Bouvatier: EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Laetitia Lepetit: LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges
Pierre-Nicolas Rehault: LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges

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Abstract: We highlight caveats arising in the application of traditional ROA-based Z-scores for the measurement of bank insolvency risk, develop alternative Z-score measures to resolve these issues , and make recommendations for best practice for the US/Europe based on the experience of the …nancial crisis of 2007-2008. Using a probabilistic approach (i) our novel regulatory capital Z-score dominates traditional Z-score measures for both US/Europe; (ii) Z-scores computed with exponentially weighted moments dominate those with moving moments for the US sample, but not for Europe. For both US/Europe, using a multivariate logit approach (i) allows computation of augmented Z-scores that provide probabilities of distress that better discriminate between distressed/surviving banks than the probabilistic approach; (ii) suggests that the ROA-based Z-score using current values of the capital-asset ratio is best, calculated either with moving or exponentially weighted moments.

Keywords: bank; insolvency risk; Z-score; risk measure (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-rmg
Date: 2018-11-28
Note: View the original document on HAL open archive server: https://hal-unilim.archives-ouvertes.fr/hal-01937929
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