Anatomy of Bank Distress: The Information Content of Accounting Fundamentals within and Across Countries

34 Pages Posted: 4 Oct 2014

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Janko Cizel

VU University Amsterdam; Tinbergen Institute; Duisenberg School of Finance; New York University (NYU) - Salomon Center

Herbert A. Rijken

Vrije Universiteit Amsterdam (Free University)

Date Written: October 3, 2014

Abstract

This paper studies the information content of bank accounting fundamental data in the prediction of bank distress using an international sample of banks from 15 Western European countries and the U.S. during the financial crisis of 2007-12. We assemble an exhaustive and unique set of bank distress events, and model bank distress as a function of accounting-based fundamentals, while controlling for country-year fixed effects, and the type of resolution in the distressed entity. The analysis of our bank distress models reveals a substantial cross-country variation in the ability of accounting fundamentals to discriminate between distressed and non-distressed banks within countries. We examine the extent to which the variation in informativeness and accuracy of accounting fundamentals is explained by proxies of country-specific bank disclosure requirements and the enforcement thereof. We show that the association between accounting fundamentals and bank distress is attenuated in jurisdictions with relatively lax bank disclosure laws and their implementation. Accounting ratios, whose information value is the most sensitive to the quality of regulatory disclosure include regulatory capital ratios, loan loss provisions, and unreserved loan losses. The evidence in this paper supports the oft-voiced concern that excessive flexibility in financial reporting undermines the ability of accounting signals to accurately capture the underlying financial health of banks. Obliqueness of the distressed bank’s accounting signals makes such information less useful for investors and regulators, and thus has negative regulatory implications.

Keywords: Bank distress, Bank Resolution, Disclosure, Accounting, Basel III

JEL Classification: G21, G28, G33, G38, K33, M41, M49

Suggested Citation

Altman, Edward I. and Cizel, Janko and Rijken, Herbert A., Anatomy of Bank Distress: The Information Content of Accounting Fundamentals within and Across Countries (October 3, 2014). Available at SSRN: https://ssrn.com/abstract=2504926 or http://dx.doi.org/10.2139/ssrn.2504926

Edward I. Altman

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Janko Cizel (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Duisenberg School of Finance ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States

Herbert A. Rijken

Vrije Universiteit Amsterdam (Free University) ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986101/6060 (Phone)
+31 20 5986020 (Fax)

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