Bank Failure Prediction with Logistic Regression

Transcription

1 Inernaonal Journal of Economcs an Fnancal Issues Vol. 3, No. 2, 213, pp ISSN: Bank Falure Precon wh Logsc Regresson aha Zaghou Faculé es Scences Economques e e Geson e uns, Unversé uns El Manar. unsa. Emal: [email protected] ABSRAC: In recen years he economc an fnancal worl s shaken by a wave of fnancal crss an resule n volen bank farly huge losses. Several auhors have focuse on he suy of he crses n orer o evelop an early warnng moel. I s n he same pah ha our work akes s nspraon. Inee, we have re o evelop a precve moel of unsan bank falures wh he conrbuon of he bnary logsc regresson meho. he specfcy of our precon moel s ha akes no accoun mcroeconomc ncaors of bank falures. he resuls obane usng our provsonal moel show ha a bank's ably o repay s eb, he coeffcen of bankng operaons, bank profably per employee an leverage fnancal rao has a negave mpac on he probably of falure. Keywors: Bank Falures; Log Moel JEL Classfcaon: G33; C34; C35 1. Inroucon he wo las ecaes are marke by noable bankng an fnancal crses by her exen as well as her exorban fnancal coss. In fac, many evelopng counres wnesse serous surbances o her bankng sysems manfesng he companes nsolvency, he surbances of exchange flow, whch wen even o he bankrupcy of bg companes. oay, bankng an fnancal crses show a sharp perssence, snce mos counres affece by he 28 crss coul no fn a way ou of ye. Moreover, he curren crss requres a bgger aenon han ha pa o s preecessors snce bears a worlwe an bankng characer. hs crss ouche manly he bankng sysems havng ffcules, knowng ha hey represen he hear of he economc acvy an s fnancng. From now on, every malfunconng of bankng sysem wll change he behavour of economc agens; creae a feelng of srus of nvesors an eposors owars cre esablshmens, whch resuls no serous surbances o real economy. he reunancy of hese crses gves brh o a feelng of fear owars he nsallaon of a cyclc an chronc phenomenon whch exhauss all remees whou geng ou of hem. From now on, he esablshmen of an avance aler moel of bankng an fnancal crses becomes more han necessary o beer aver evenual fnancal ols an seek even o avo hem. Up o here, he maory of emprcal wrngs abou crses avance eecon are of macroeconomc orer. A suy of macroeconomc aa s hen use o evelop an aler sysem whch s able o eec several fnancal crses n avance. Moreover, hs emprcal sep presens lms snce can eec he bankng weaknesses of mcroeconomc naure beforehan. Acually, we hnk ha he negraon of a mcroeconomc approach n he consrucon of a bankng crses precocous aler moel coul enlarge s eecon power. hs arcle s organse n he followng way. In he secon o come, we presen a leraure revew on he mcroeconomc ncaors of bankng weaknesses. Secon 3 mehoology. In secon 4, a aa presenaon an a selecon of he moel varables. We presen our resuls of he esmaon n secon 5. Secon 6 he concluson of our work. 2. Bref Leraure Revews Many auhors are orene owars he suy of bankng crses as esrucve phenomena focalzng on he evens whch precee her happenng. In parcular, hese sues am a consrucng sasc moels ha sen an avance early warnng sgnal o bankng bankrupcy early warnng sysem. hs meho s base upon he classfcaon of banks no wo groups scrmnang he soun healhy banks from hose ha are n ffcules. 537

2 Inernaonal Journal of Economcs an Fnancal Issues, Vol. 3, No. 2, 213, pp Auhors lke Sanoso (1996, Gasbarro e al. (22 searche o nvolve he eermnans of Inonesan banks efecs n her consrucon of an early warnng sysem. Ohers lke, Powo (2 searche o consruc a bankrupcy ncaor panel n he Economc an Moneary Unon of he Wes Afrcan counres for he consrucon of a logsc an cononal moel n aa of panel. In hese escenens, he maor emprcal sues are subve no wo caegores of approaches: macroeconomc an mcroeconomc. he bg range of sues whch rea he macroeconomc approach pus n avance he bg nfluence of economc conracons on banks ofen maeralze by he bln an brual fnancal lberalzaon makng banks more vulnerable o macroeconomc shocks. Parcularly, he exalaon of publc polcs no aape o he fnancal changes an he laxness of he supervson auhores, worsenng srongly he bankng weaknesses. Neverheless, he applcaon of hgh neres raes, he massve reflow of foregn fnancal flows, he ncrease of non performng cre raes an he ecrease of currency sock amoun are macroeconomc varables ha nfluence he funconng of boh sysems; economc an fnancal. (Demrguc-Kun an Deragche (1998, 22, Kamnsky an Renhar (1999. Furhermore, he mcroeconomc approach ams a quesonng he nsuonal facor such as he prncple facor of bank vulnerably. hs suy uses a marx of accouns raos gahere from nvual balance shees of arge banks. hese raos reflec he nvual an neror behavour of banks, whch allows us o consruc an nformaon panel abou he level of ffculy of he laer. In fac, mos of bankng crses were always precee by bankrupces, closng successon, fuson or repurchase by oher fnancal nsuons (Kamnsky an Renhar, hese bankrupces are explane by Bell an Pan n (2 by an unbalance of he asses level n favour of he lables. he ncrease of he lables volume s ofen explane by a hgh level of efec paymen by borrowers causng a ry-up of asses an hen of a huge loan cre. In aon, a suen an manane n me surbances of asses prces on he marke ncrease he rsks n he marke. Meanwhle, a fnancal nsuon s no proece from an evenual race runnng o wckes, a sealhy an brual phenomenon where he facors responsble for are always exeror an supple by a srong nformaon asymmery. hs suaon can affec banks nvually; hey can also be sprea from a counry o anoher hrough a conagon phenomenon. Mnsky (1957, unerlnes he mporance of he excess of cres n he come-up of fnancal crses. He explans ha n a phase of economc growh an sably he banks behavours ens o evelop no more laxness by provng more an more cre loans whou havng nformaon abou he ebors ably o honour her commmens. In fac, he expanson of loans sze s suspece when excees he GDP n erms of growh. hus, he cre growh wll be assocae o an excessve rsk akng from he banks n her cre acvy. On he oher han, Mo an Plhon (21 show ha a change n he fnancal agens behavour can cause a pure fnancal conagon whou, causng an exernal shock. hey explan hs change by he preference of mmeae neres an he ase pronounce by he banks o ake rsks. Banks have change her behavours of resrcon an conrol an hey move owars much sofness an flexbly hrough aapng he noon of speculaon as a source of rsky profably. he recen crses showe he savanages of preferrng he mmeae neres an he pronounce ase of banks for rsk. hey arose followng a maor ncrease of cash operaons on he erve proucs o generae mporan revenues by brngng ou rsks of he assessmen. hs pracce reuce he capal funs an he mpose axes n rsk akng (Ranall, Mehoology Our economerc analyss has o o wh he esmaon of moel of qualave answer, makng conrbuon o he Bnary Logsc Regresson meho. hs economerc meho was use n he work of Demrguc-Kun an Deragache (1998. her suy focuse on 65 evelope an evelopng counres along he pero on annual aa usng he moel Log of economerc esmaon of he probably o a hreaene economy whch s unergong a bankng crss. Mo an Plhon (21, referrng o he works of Knleberger (1996, have use n her suy abou he Argenna crss n 1995 an Korea n 1998 he Prob meho whle negrang mcroeconomc aa relave o he akng of banks rsks by means of speculaon. I s n hs same ren ha our emprcal an mehoologcal reasonng akes s nspraon. 538

3 Bank Falure Precon wh Logsc Regresson he bnary logsc regresson meho ha we aop assumes ha he fac ha he explcave varables X shoul be fnancal raos reflecng he mcroeconomc acves of banks. he couples ( X, Y ( X n, Y n, are nepenen an encally srbue accorng o he normal law such as X. he epenen varable Y allows a ranom law of Benoull whch akes he value of 1 when here s a bankng efec or oherwse. Our am hrough he use of he Log meho s o prec he probably of bankng efec llusrae by PD P( Y 1 X x. Meanwhle, snce our regresson s bnomal we wll use he meho of generalze lnear meho (GLM nrouce by Neler an Weerburn (1972. he scores are calculae n a frs sep by X ha represens a lnear combnaon of fnancal raos. In he secon sep, he efec probably wll be esmae by means of he funcon G: PD P( Y 1 X x G( X (1 wh: G:,1 s a logsc funcon ha akes values beween an 1: 1 G(s = ( s (2 s e e s : scores are gven by he funcon log os: ( s s= ln( (3 1 ( s he esmaon of parameers,..., s va he meho of maxmum lkelhoo proceure an funcon of he Lagrangan s wren: n Y ( X (1 Y log(1 ( X L( (4,..., 1 Y flucuaes beween an 1 so we can wre our Lagrangan as follows: Y log( X (1 Y log(1 ( X log L( (5 n,..., 1 o eermne he esmaors ( ˆ,... ˆ we Maxmzes he funcon L or logl. A he en he maxmum lkelhoo esmaor of he probably of efaul (PD s gven by: ˆ ˆ ( X ( X (6 Furhermore, s necessary o choose he mos performng explcave varables o prec he bankng efec. For he bes moel selecon, we calculae he Akake Informaon Creron (AIC. Frs of all, we apply he sep by sep regresson nroucng all he explcave varables an n every sep some varables wll be remove. hen, hese moels are classfe accorng o her AIC an he moel havng he weakes AIC wll be selece. he AIC can be coune as follows: AIC = -2logL+2p (7 wh: L: maxmum lkelhoo of he fe moel p: he number of esmae parameers In fac, he moel ha has he lowes evaon value-2logl s one who ams he bes f. In a fnal sep an afer choosng he moel wh he weakes AIC value, we calculae he es ch-wo o es he goo aa ausmen by he chosen logsc moel. he value of ch-wo s gven by: 2 = (evaon of he frs moel wh he consan (nercep-he laes moel evance e : 2 ( 2log L ( 2log (8 N L F 539

4 Inernaonal Journal of Economcs an Fnancal Issues, Vol. 3, No. 2, 213, pp Daa an Varables 4.1 Daa he aa use n hs work are collece from he annual repors of he Cenral Bank of unsa an unsan assocaon of banks an fnancal nsuons. Our suy s base on annual aa spannng 8 years, from 22 o 21 for he 14 unversal unsan banks. Banks are he Amen Bank (AB, Banque Naonale Agrcole (BNA, La Socéé unsenne e Banque (SB, Banque e unse (B, Unon Inernaonale es Banques (UIB, he Arab unsan Bank (AB, Aar Bank (Aar Bank, La Banque e l'haba (BH, Banque Inernaonale Arabe e unse (BIA, La Banque Franco-unsenne (BF, La Banque unso-kowenne (BK, Banque unso-lbenne (BL he unsan Qaar Bank (QB, L Unon Bancare pour le Commerce e l Inusre (UBCI, La Banque e la unse e es Emras (BE. 4.2 Selecon of varables he epenen varable In leraure, he maory of emprcal sues of he bankng efec or crss bul bnary ncaors o enfy he crses epsoes. In he presen suy, our varable of bnary response answer s esablshe hrough an nex of bankng weakness measure nspre by he works of Kbrcoglu (22. hs nex s bul hrough hree ncaors; he bankng eposs, he prvae secor cres an he loans conrace by he banks. he nex s hen wren: ( D ( Cp cp ( E e cp e FB 3 Where D represens he annual varaon of bankng eposs volume, cres accore o he prvae secor, Cp he annual varaon of E he annual varaon of loans conrace by every bank. an are respecvely he arhmec an he sanar evaon of varables. hus, here s an epsoe of a weakness average when he value of FB nex vares beween an -.5 an he hgh bankng weakness when he FB value equaes or s nferor o -.5. FB.5 low fragly FB.5 srengh fragly In aon, we carry ou he ransformaon of values aken by he nex FB as bnary response as follows: f FB.5 Y ake1 f FB.5 Y ake Fnally, our rao of bankng weakness s esablshe an convere no bnary responses aape o our varable o explan our sample of 14 unsan banks urng he pero ( he explanaory varables In our suy, we manan 18 raos assocae o fferen mensons of fnancal analyss ha represen he fferen ncaors of bankng vulnerably measure. hese raos are regroupe no fve groups, lquy, managemen, acvy, profably an vulnerably shown n able 1. he escrpve sascs are gven n able 2. able 1. he fnancals raos Rao No. Defnon Rao Caegory x1 D/A oal Depos/ oal Asses Lquy x2 D/P oal Depos/oal lables Lquy x3 C/D oal Cre/ oal Depos Lquy x4 C/E oal Cre/Loans Lquy x5 E/A Deb / oal Asses Lquy x6 ChB/A Charges/oal Asses Managemen x7 PB/A bankng prouc/oal Asses Managemen x8 ChB/PB bank charges/ne ncome Managemen x9 PnB/Nemp bankng prouc/number of Employees Managemen x1 C/A oal Cre/oal Asses Acvy 54

5 Bank Falure Precon wh Logsc Regresson x11 C/P oal Cre/oal lables Acvy x12 C/CP oal Cre/Workng Capal Acvy x13 PnB/A bankng prouc/oal Asses Profably x14 E/(K+R Loans/(Capal+Reserve vulnerably x15 C/(D+E oal Cre/oal Depos+ Loans vulnerably x16 CCP/P Loans from Cenral bank/oal lables vulnerably x17 CP/P Workng Capal/oal lables vulnerably x18 D/M2 oal Depos/M2 vulnerably able 2. Descrpve Sascs Rao No. Mn Mean Max kuross Sa.Dev x x x x x x x x x x x x x x x x x x he use of he sep by sep proceure n he choce of he mos scrmnang varables shows a creron of he weakes AIC nformaon of 71.5 for he moel ha regroups he varables x5, x6, x8, x9, x12, x13 an x14 whch are presene by able 3. able 3. Selece varables accorng o he creron of he lowes AIC nformaon Rao No. Defnon Rao Caegory x5 E/A Deb / oal Asses Lquy x6 ChB/A Loa Bankng / oal Asses Managemen x8 ChB/PB Loa Bank / Bankng Prouc Managemen x9 PnB/Nemp Ne bankng / Number of employees Managemen x12 C/CP oal Cre / Equy Acvy x13 PnB/A Ne bankng ncome / oal Asses Profably x14 E/(K+R Borrowng / (Capal + Reserve vulnerably 5. Emprcal Resuls Accorng o he able 4 we noce ha all he varables are sascally sgnfcan o he hreshol of 5 % excep for he raos x9 an x13 ha are sgnfcan o 1 %. In he oher han, our moel s globally sgnfcan o 1 % wh a Ch2 sasc of he raos x5, x8, x9 an x12 are negavely sgnfcan. he esmaon reveals ha he varable whch measures he ably of banks o repay her ebs (x5 ecreases n que a sgnfcan way he probably of efec for he unsan banks. Also, he varable x8, x9 an x12 ha are respecvely he bankng exploaon coeffcen, he efec bankng probably, he bankng profably per employee an he rao of fnancal shf, negavely nfluence he efec probably. In he oher han, he raos x6, x13 an x14 ha represen he rao of exploaon coss, he bankng profably an he ably of he bank o refun pay back s ebs, save he posve sgnfcance an hen o ncrease respecvely he probably of bankng efec. 541

6 Inernaonal Journal of Economcs an Fnancal Issues, Vol. 3, No. 2, 213, pp able 4. Resuls of log regresson Coeffcen Erreur S z p. crque Consane x ** x ** x ** x *** x ** x *** x ** Loglkelhoo Loglkelhoo Chsquare P-value.2 (Devance he os rao suy gven n able 5 shows ha he bankng profably x 13 recors a very hgh rao whch s largely superor o 1, hs means ha he efec response s srongly probable. In fac, when a bank splays que a low profably rae means mperavely ha exss n a fnancal ffculy o cover s charges or o honor s engagemens an hen he ncrease of bankrupcy rsk. Also, he probably of efec response s srong for he rao of exploaon coss x6. Unenably, he ncrease of bankng exploaon coss engeners a conserable ecrease of he profably an hen an mbalance of asses lables, whch pus he banks n ffculy. able 5. Os Rao Os Raos Inercep x5 x6 6.96E+72 x8 x x x E+49 x he rao x14 ha measures he ably of a bank o pay back s ebs, recors que a hgh rao an consequenly he efec response s also hgh. I s even ha, f he sze of bank eb s so mposng compare o savngs an bankng capal, he bank s hen foun unable o honor s commmen owars her leners. In fac, he nably of repaymen pushes banks no ffcules o resor o fsh-ou servce of he lener as las resor oherwse bankrupcy an ucary lquaon. he response absence of efec s even o an X= x5 an X=x8 wh a null os rao. Hence, he efec response s of.92,.74 mes respecvely for an X=x9 an X=x Concluson he obecve of hs suy s o esablsh he mcroeconomc ncaors whch are able o prec he bankng efec. he use of collece fnancal raos from he unsan banks balance shees shapes our baery of ncaors nspre by he CAMEL ypology, from whch we wane o selec he raos ha have a srong precve power o consruc a prevson moel of bank efec from. he use of a vecor of raos selece from avance by a sepwse regresson, lke a vecor of explanaory varables n our logsc moel have prove us wh sasfacory resuls wh expece sgns an sgnfcaons. Lkewse, he mos pernen raos n he explanaon of bankng efec a he unsan banks are he ecrease of bankng profably an he ably of banks o repay her ebs whch appear o be a hgh o rao. 542

7 Bank Falure Precon wh Logsc Regresson References Bell, J., Pan, D. (2, Leang Incaor Moels of Bankng Crses A Crcal Revew. Bank of Englan Fnancal Sably Revew, December 29, p Demrguc-Kun, A., Deragache, E. (1998, he Deermnans of Bankng Crses n Developng an Develope Counres. IFM saff papers, 45(1, Demrguc-Kun A., Deragache E., (22, Does epos nsurance ncrease bankng sysem sably? An emprcal nvesgaon, Journal of Moneary Economcs, 49(7, Gasbarro, D., Saguna, I., Zumwal, J.K. (22, he changng relaonshp beween CAMEL rangs an bank sounness urng he Inonesan bankng crss. Revew of Quanave Fnance an Accounng, 19(3, Kamnsky, G., Renhar, C. (1999, he wn crses: he causes of bankng an balance- of-paymens problems. Amercan Economc Revew, Amercan Economc Assocaon, 89( Kbrcoglu, A. (22, Excessve Rsk-akng, Bankng Secor Fragly, an Bankng Crses, Unversy of Illnos a Urbana-Champagn, College of Busness. Workng Papers 2-114, Knelberger, C. (1996, Manas Pancs an Crashes: A hsory of Fnancal Crss, 3 r Eon, New York, John Wlley & Sons. Mnsky, H.P. (1957, Cenral bankng an money marke changes. Quarerly Journal of Economcs, 71(2, Mo, L., Plhon, D. (21, la lbéralsaon fnancère, spéculaon e crses bancares, Econome Inernaonale, la revue u CEPII, 85, Neler, J.A., Weerburn, R.W.M. (1972, Generalze lnear moels, Journal of he Royal Sascal Socey, Seres A, 135(3, Powo, F.B. (2, Les éermnans es falles bancares ans les pays en éveloppemen: le cas es pays e l'unon économque e monéare Oues-afrcane (UEMOA, Déparemen e scences économques, Unversé e Monréal, Caher e recherche, 2, Ranall, D. (29, Qu oue avec le feu, Fnance & Développemen,46 (3, Sanoso, W. (1996, he Deermnans of Problem Banks n Inonesa. Bankng Research an Regulaon Paper, Bank Inonesa, Workng Paper No. 32,