Abstract
Bank risk is not directly observable, so empirical research relies on indirect measures. We evaluate how well Z-score, the widely used accounting-based measure of bank distance to default, can predict bank failure. Using the U.S. commercial banks’ data from 2004 to 2012, we find that on average, Z-score can predict 76% of bank failure, and additional set of other bank- and macro-level variables do not increase this predictability level. We also find that the prediction power of Z-score to predict bank default remains stable within the three-year forward window.
Original language | English |
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Pages (from-to) | 333-360 |
Number of pages | 28 |
Journal | Financial Markets, Institutions & Instruments |
Volume | 25 |
Issue number | 5 |
Early online date | 14 Nov 2016 |
DOIs | |
Publication status | Published - Dec 2016 |
Keywords
- z-score
- bank failure
- financial crisis
- E37
- G01
- G21