The Subprime Crisis Once Again, Z-Score or Rating: A Study on Banks of the Euro Zone

Abstract

This article focuses on the study of the impact of prudential banking regulations on the risk of bank failures in the Eurozone during the subprime financial crisis. Two indicators of bankruptcy risk measures are used:

(i) the Z-score and

(ii) the rating.

The methodology adopted consists of making estimates using a Logit model including CAMEL variables, regulatory variables, and macroeconomic-level variables. The empirical results found show that, regardless of the approach used to measure the risk of bankruptcy, variables such as the strengthening of equity, the level of liquidity, the restriction and supervision of banking activities are statistically significant. In addition, we find that the Z-score, as a method of assessing the banking risk, shows a certain superiority compared to the rating to better prevent in ex-post the cases of banks in bankruptcy during the subprime crisis.

Keywords: Z-Score, Rating, Subprime Crisis, Bank Failure, CAMEL, Logit Model

JEL Classification: G21, G28, G33, G38