Bank insolvency risk and Z-score measures: caveats and best practice

Abstract : We highlight caveats arising in the application of traditional ROA-based Z-scores for the measurement of bank insolvency risk, develop alternative Z-score measures to resolve these issues , and make recommendations for best practice for the US/Europe based on the experience of the …nancial crisis of 2007-2008. Using a probabilistic approach (i) our novel regulatory capital Z-score dominates traditional Z-score measures for both US/Europe; (ii) Z-scores computed with exponentially weighted moments dominate those with moving moments for the US sample, but not for Europe. For both US/Europe, using a multivariate logit approach (i) allows computation of augmented Z-scores that provide probabilities of distress that better discriminate between distressed/surviving banks than the probabilistic approach; (ii) suggests that the ROA-based Z-score using current values of the capital-asset ratio is best, calculated either with moving or exponentially weighted moments.
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https://hal-unilim.archives-ouvertes.fr/hal-01937929
Contributeur : Thierno Barry <>
Soumis le : mercredi 28 novembre 2018 - 13:07:34
Dernière modification le : mercredi 5 décembre 2018 - 01:22:31

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Bouvatier-et-al2018.pdf
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  • HAL Id : hal-01937929, version 1

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Vincent Bouvatier, Laetitia Lepetit, Pierre-Nicolas Rehault, Frank Strobel. Bank insolvency risk and Z-score measures: caveats and best practice. 2018. ⟨hal-01937929⟩

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