At Night All Cats Are Gray, but at Day They Are Not: Default (PD) Forecasts Capturing Italian Banks’ Idiosyncrasy

51 Pages Posted: 27 Jun 2022 Last revised: 2 Apr 2024

See all articles by Gianpiero Chironna

Gianpiero Chironna

Bari Aldo Moro University

Giuseppe Orlando

Università degli Studi di Bari “Aldo Moro” (UNIBA) - Department of Economics and Mathematical Methods

Date Written: August 31, 2023

Abstract

Although the probability of default (PD) modeling has reached a great maturity in both academia and business, for the Italian case we demonstrate that banks' available PD models would be misleading if today applied directly to Italian banks. We argue that what determines the PD of Italian banks, rather than the liquidity, are the return on assets (ROA), the financial leverage and the BCC category of the bank. Furthermore, we demonstrate that the conventional approach dominates the more trendy machine learning (ML). Finally, we demonstrate that model's performance could be used as a supervisory tool for retrospective analysis of the bank's position. Moreover, we bring positive evidence on the BCC 2016 reform in Italy.

Keywords: bank failure, adaptive lasso, logistic regression, CART, probability of default, random forest, machine learning, model selection

JEL Classification: C52, C53, D22, G21, G28, G33

Suggested Citation

Chironna, Gianpiero and Orlando, Giuseppe, At Night All Cats Are Gray, but at Day They Are Not: Default (PD) Forecasts Capturing Italian Banks’ Idiosyncrasy (August 31, 2023). Available at SSRN: https://ssrn.com/abstract=4141518 or http://dx.doi.org/10.2139/ssrn.4141518

Gianpiero Chironna

Bari Aldo Moro University ( email )

Bari
Italy

Giuseppe Orlando (Contact Author)

Università degli Studi di Bari “Aldo Moro” (UNIBA) - Department of Economics and Mathematical Methods ( email )

Via C. Rosalba 53
VI Floor, Room 12
Bari, 70124
Italy
+39 080 5049218 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
125
Abstract Views
584
Rank
411,140
PlumX Metrics