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Predicting Distress in European Banks

35 Pages Posted: 8 Nov 2013  

Frank Betz

European Union - European Investment Bank

Silviu Oprica

European Central Bank (ECB)

Tuomas A. Peltonen

European Central Bank (ECB)

Peter Sarlin

Hanken School of Economics; RiskLab Finland

Date Written: October 11, 2013

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.

Keywords: bank distress; early-warning model; prudential policy; signal evaluation

JEL Classification: E44, E58, F01, F37, G01

Suggested Citation

Betz, Frank and Oprica, Silviu and Peltonen, Tuomas A. and Sarlin, Peter, Predicting Distress in European Banks (October 11, 2013). ECB Working Paper No. 1597. Available at SSRN: https://ssrn.com/abstract=2338998

Frank Betz

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Silviu Oprica

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Peter Sarlin (Contact Author)

Hanken School of Economics

PO Box 479
FI-00101 Helsinki
Finland

RiskLab Finland ( email )

Turku, 20520
Finland

HOME PAGE: http://risklab.fi/people/peter/

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