An Early Warning System for Less Significant Italian Banks

42 Pages Posted: 6 Aug 2019

See all articles by Fabrizio Ferriani

Fabrizio Ferriani

Bank of Italy

Wanda Cornacchia

Bank of Italy

Paolo Farroni

Bocconi University; Bank of Italy

Eliana Ferrara

Bank of Italy

Francesco Guarino

Bank of Italy

Francesco Pisanti

Bank of Italy

Date Written: February 4, 2019

Abstract

This paper presents a statistical early warning system for less significant institutions (LSIs) under the direct supervision of the Bank of Italy. The model is calibrated on the basis of a wider definition of possible distress events, using the universe of Italian LSIs active in the period 2008-2016 as a reference. We selected an extensive list of variables that might give early warnings of a crisis in relation both to the overall banking system and Italy’s macro-financial situation, and to individual banks’ performances. A logit model is used to calculate the probability of default (PD) for each bank, with time horizon estimates set at four and six quarters. The empirical specifications proposed are tested using several statistical indices; the ex-post analysis of the estimated PDs shows a percentage of correct bank classification in the range of 80-90 per cent, with better results the nearer the moment of prediction is to when a crisis situation actually occurs.

Keywords: early warning system, default, less significant institutions, CAMELS, banking supervision

JEL Classification: G21, G28

Suggested Citation

Ferriani, Fabrizio and Cornacchia, Wanda and Farroni, Paolo and Ferrara, Eliana and Guarino, Francesco and Pisanti, Francesco, An Early Warning System for Less Significant Italian Banks (February 4, 2019). Bank of Italy Occasional Paper No. 480, February 2019, Available at SSRN: https://ssrn.com/abstract=3432522 or http://dx.doi.org/10.2139/ssrn.3432522

Fabrizio Ferriani (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Wanda Cornacchia

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Paolo Farroni

Bocconi University ( email )

Milano
Italy

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Eliana Ferrara

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Guarino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Pisanti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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