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Achieving a balance between the avoidance of banking problems and their resolution—can financial cycle dynamics predict bank distress?

Author

Listed:
  • Giannoula Karamichailidou

    (University of Auckland)

  • David G. Mayes

    (University of Auckland
    University of Oslo)

  • Hanno Stremmel

    (WHC – Otto Beisheim School of Management)

Abstract

The global financial crisis has emphasised the importance of the financial cycle in contributing to bank failures. In this paper, we consider how far it is possible to anticipate problems in banks by using early warning indicators available from published information on the financial cycle in the economy. We use a traditional z-score model that incorporates bank-specific, banking structure and macroeconomic variables to which we add financial cycle indicators. We test these models on an unbalanced panel of 2239 European banks over the period 1999–2014. We find that the financial cycle adds noticeably to the ability to predict bank distress up to 2 years into the future.

Suggested Citation

  • Giannoula Karamichailidou & David G. Mayes & Hanno Stremmel, 2018. "Achieving a balance between the avoidance of banking problems and their resolution—can financial cycle dynamics predict bank distress?," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(1), pages 18-32, January.
    • Handle: RePEc:pal:jbkreg:v:19:y:2018:i:1:d:10.1057_s41261-017-0054-z
    DOI: 10.1057/s41261-017-0054-z
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