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An efficient and functional model for predicting bank distress: In and out of sample evidence

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  • Cleary, Sean
  • Hebb, Greg

Abstract

We examine the failures of 132 U.S. banks over the 2002–2009 period using discriminant analysis and successfully distinguish between banks that failed and those that didn’t 92% of the time using in-sample quarterly data. Our two most important variables are related to bank capital and loan quality, as one might expect; although bank profitability is also important. The resulting model is then used out-of-sample to examine the failure of 191 banks during 2010–11, with predictive accuracy in the 90–95% range.

Suggested Citation

  • Cleary, Sean & Hebb, Greg, 2016. "An efficient and functional model for predicting bank distress: In and out of sample evidence," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 101-111.
    • Handle: RePEc:eee:jbfina:v:64:y:2016:i:c:p:101-111
    DOI: 10.1016/j.jbankfin.2015.12.001
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    More about this item

    Keywords

    Bank failures; Financial distress; Financial crisis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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