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http://ssrn.com/abstract=1716204
 
 

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Predicting Bankruptcy Using Neural Networks in the Current Financial Crisis: A Study of U.S. Commercial Banks


Félix J. López-Iturriaga


University of Valladolid - Department of Financial Economics and Accounting; National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy

Óscar López-de-Foronda


University of Burgos - Department of Economics

Iván Pastor-Sanz


University of Burgos

November 28, 2010


Abstract:     
We develop a model of neural networks to study the bankruptcy of U.S. banks. We provide a new model to predict bank defaults some time before the bankruptcy occurs, taking into account the specific features of the current financial crisis. Based on data from the Federal Deposit Insurance Corporation, our results corroborate that distressed banks undertook higher credit risks and were more heavily concentrated on real estate. Interestingly, the distressed banks do not show lower cost efficiency than their wealthy counterparts, suggesting that bank failures are a consequence of careless bank strategies rather than low cost efficiency. After drawing the profile of distressed banks, we use our model to predict future bankruptcies and test the performance of the model by comparing our predictions with the actual bankruptcies between January-June 2010. Our model shows a high discriminant power and is able to differentiate correctly wealthy and distressed banks. Specifically, our model would have been able to predict in December 2009 around 60% of failures that occurred in the first six months of 2010.

Number of Pages in PDF File: 33

Keywords: Banks, Bankruptcy, Financial Crisis, Neural Networks

JEL Classification: G21, C45, G33

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Date posted: November 28, 2010  

Suggested Citation

López-Iturriaga, Félix J. and López-de-Foronda, Óscar and Pastor-Sanz, Iván, Predicting Bankruptcy Using Neural Networks in the Current Financial Crisis: A Study of U.S. Commercial Banks (November 28, 2010). Available at SSRN: http://ssrn.com/abstract=1716204 or http://dx.doi.org/10.2139/ssrn.1716204

Contact Information

Félix Javier López-Iturriaga
University of Valladolid - Department of Financial Economics and Accounting ( email )
Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)
HOME PAGE: http://www2.eco.uva.es/flopez
National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy ( email )
Lebedeva,27
Perm, Perm 614070
Russia
Oscar Lopez de Foronda
University of Burgos - Department of Economics ( email )
Plaza Infanta Elena
E09001 Burgos
Spain
Iván Pastor-Sanz (Contact Author)
University of Burgos ( email )
Hospital del Rey, s/n
Burgos, 09001
Spain
Feedback to SSRN


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