Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154030
Authors: 
Betz, Frank
Oprica, Silviu
Peltonen, Tuomas A.
Sarlin, Peter
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1597
Abstract: 
The paper develops an early-warning model for predicting vulnerabilities leading to distress in European banks using both bank and country-level data. As outright bank failures have been rare in Europe, the paper introduces a novel dataset that complements bankruptcies and defaults with state interventions and mergers in distress. The signals of the early warning model are calibrated not only according to the policy-maker’s preferences between type I and II errors, but also to take into account the potential systemic relevance of each individual financial institution. The key findings of the paper are that complementing bank specific vulnerabilities with indicators for macro-financial imbalances and banking sector vulnerabilities improves model performance and yields useful out-of-sample predictions of bank distress during the current financial crisis.
Subjects: 
bank distress
early-warning model
prudential policy
signal evaluation
JEL: 
E44
E58
F01
F37
G01
Document Type: 
Working Paper

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