Measuring bank risk: Forward-looking z-score

Hafeez, Bilal; Li, Xiping; Kabir, M. Humayun; Tripe, David

doi:10.1016/j.irfa.2022.102039

Cited by 36 publications

(12 citation statements)

References 53 publications

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“…The literature provides many variants of the Z‐score, of which the scores for banks' probability of default were conventionally computed based on ROA. Among these proxies of bank insolvency risk (e.g., ROE‐based, regulatory, returns‐based or forward‐looking and time‐varying Z ‐scores), the first ROE‐based ‘adjustment’ of the conventional Z ‐score enjoys increased popularity (Bouvatier et al, 2017; Hafeez et al, 2022; Lepetit & Strobel, 2015).…”

Section: Methodsmentioning

confidence: 99%

Derivatives use and the risk‐taking behaviour of African banks

Bekale

Alagidede

Mensah

2023

J of Intl Development

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Evidence has been presented that banks typically maintain risk‐exacerbating derivatives positions. Within the context of African economies, this paper focuses on the impact of derivatives activities on the risk‐taking impulse of banks. It also examines the risk‐taking impulse resulting from banks' business lending efficiency. Estimation was carried out using standard ROA—and ROE—based idiosyncratic risk metrics and two‐stage least squares regression. Results indicate unsustainable levels of banking stability and increased risk‐taking. The banks exhibit hazardous behaviour in the current climate of the rapid transformation of the banking systems, calling for regulatory vigilance to limit imprudent actions. [Correction added on 17 March 2023, after first online publication: This version has been updated with a truncated abstract as supplied by the author.]

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Section: Methodsmentioning

confidence: 99%

Derivatives use and the risk‐taking behaviour of African banks

Bekale

Alagidede

Mensah

2023

J of Intl Development

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“…Scholars made the analysis to determine the connection between bank risk-taking and financing liquidity. When banks reduce their funding-liquidity risks, they raise their risk-weighted assets, enhance liquidity and decrease their Z-scores [16][17][18][19]. Furthermore, banks with lower financing liquidity risk were less risk-averse during the Global Financial Crisis.…”

Section: Objectives Of the Studymentioning

confidence: 99%

The Financial Performance and Solvency Status of the Indian Public Sector Banks: A CAMELS Rating and Z Index Approach

Kumar¹,

Verma²,

Bhatnagar³

et al. 2023

IJSDP

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Recently, there has been much discussion about the importance of sound financial regulation and supervision in light of the increasingly integrated financial markets. CAMELS rating is an established method to compare the performance of banks and the performance of financial institutions. This study compares India's working public sector banks based on the CAMELS rating parameters. The solvency position and the probability of bankruptcy are also measured with the help of the Z score. Twelve banks have been selected for the study over 6 years between 2015 and 2021. Hence, this paper determines the performance and degree of insolvency among the working public sector banks. The findings from this study show that the banks' probability of insolvency has been reduced, and the return on assets is also recovered after negative ROA during the study period.

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“…In addition, Laeven and Levine (2009) and Lepetit and Strobel (2013) recommended using a logarithm variant of the Z-score. In their study, Hafeez et al (2022) highlighted the fact that this measure is predominantly backward-looking. International Monetary Fund (2006), Huljak (2015), and Shaddady and Moore (2019) showed their discontent with the use of the Z-score as a potent indicator of bank stability.…”

Section: Measurement Of Bank Stability: a Relevant Review Of The Empi...mentioning

confidence: 99%

“…Therefore, bank experts and regulators also dismiss this metric as an all‐encompassing indicator of bank stability. A further downside is that it is essentially a backward‐looking measure (Hafeez et al, 2022), and its value is sensitive to the yearly window length (3, 4, or 5 years) used to calculate the standard deviation of ROA. Lapteacru (2016) raised the issue of inconsistency of traditional accounting‐based Z‐score as an indicator of the probability of default or the banking system stability, particularly when the entire computation process of Z‐score and its variants is based on the unrealistic assumption that ROA is a random variable with a normal distribution.…”

Section: Introductionmentioning

confidence: 99%

Beyond the Z‐score: A novel measure of bank stability for effective policymaking

Gulati

2023

Journal of Public Affairs

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This article looks beyond Z‐score and proposes a novel methodological framework to build an all‐encompassing indicator of bank stability for individual banks using the optimisation‐based ‘benefit‐of‐the‐doubt (BoD)’ approach. Unlike other available approaches, this approach is totally data‐driven and generates endogenous weights to aggregate sub‐indicators of bank stability and dimensions. Further, the final outcomes are not limited to a scalar measure of bank stability. The unique optimal weights offer valuable policy‐relevant insights and highlight the most precarious areas of stability, which demand the immediate attention of the bank's management and the industry regulators for both micro‐and macro‐level policymaking. Using the data of Indian public sector banks operating in the year 2018, the study illustrates the proposed framework to obtain a holistic indicator of bank stability, defined on 14 ratio sub‐indicators and 5 broad dimensions (soundness, asset quality, profitability, management efficiency, and liquidity) of bank stability.

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Measuring bank risk: Forward-looking z-score

Cited by 36 publications

References 53 publications

Derivatives use and the risk‐taking behaviour of African banks

Derivatives use and the risk‐taking behaviour of African banks

The Financial Performance and Solvency Status of the Indian Public Sector Banks: A CAMELS Rating and Z Index Approach

Beyond the Z‐score: A novel measure of bank stability for effective policymaking

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