Trait Recognition: An Alternative Approach to Early Warning Systems in Commercial Banking

20 Pages Posted: 2 Feb 2011

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Michele Caputo

affiliation not provided to SSRN

Drew Wagner

California State University, Stanislaus - Department of Accounting & Finance

Date Written: June 28, 2008

Abstract

The present study reports the empirical results of trait recognition (TR) as an alternative early warning system for identifying failing US commercial banks. TR has previously been employed in the sciences, and unlike previous statistical and nonparametric models, incorporates a large number of interaction variables based on the independent variables taken two and three at a time. Discriminatory original and interaction variables (or traits) are selectively retained for use in classifying observations based on a voting procedure. Comparative results for failed and nonfailed US commercial banks using Call Report data indicate that the TR model generally outperformed logit regression models, in some cases by a considerable margin. A major implication of these results is that TR could be useful in other binary choice problems in business finance and accounting, including predictions of nonbank failures, bond rating changes, and other firm events.

Keywords: failure prediction, early warning systems, bank failure

Suggested Citation

Kolari, James W. and Caputo, Michele and Wagner, Drew, Trait Recognition: An Alternative Approach to Early Warning Systems in Commercial Banking (June 28, 2008). Journal of Business Finance & Accounting, Vol. 23, Issue 9-10, pp. 1415-1434, 2008. Available at SSRN: https://ssrn.com/abstract=1753452 or http://dx.doi.org/10.1111/1468-5957.00087

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Michele Caputo

affiliation not provided to SSRN

Drew Wagner

California State University, Stanislaus - Department of Accounting & Finance ( email )

One University Circle
Turlock, CA 95382
United States

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