Should we trust the Z-score? Evidence from the European Banking Industry

Chiaramonte, Laura; Croci, Ettore; Poli, Federica

doi:10.1016/j.gfj.2015.02.002

Cited by 91 publications

(76 citation statements)

References 38 publications

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“…They also assessed the predictive power of the Z-score according to various bank characteristics and found that the Z-score was slightly more effective when the organizational and productive complexity of banks increased along with the public incentives to scrutinize bank riskiness, as it is the case for large banks. Finally, Chiaramonte et al (2015) indicated that, during the financial crisis, the accuracy of the Z-score marginally improved with respect to the whole period.…”

Section: Model Diagnosticsmentioning

confidence: 96%

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The impact of executive remuneration on risk-taking in the banking industry

Swanepol

Smit

2016

Investment Management and Financial Innovations

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In the aftermath of the credit crisis of 2007-2009, there was considerable public frustration with regard to executive remuneration, particularly in the banking industry. Consequently, the need for regulated remuneration practices became essential. For this purpose, the Prudential Regulation Authority (PRA) aims to align risk and reward by encouraging good risk management and discouraging excessive risk-taking. This paper aims to demonstrate the correlation between the health of the banking industry and economic activity, as well as the change in executive remuneration pre and post the credit crisis. In addition, the paper aims to measure the correlation between executive remuneration in the form of cash and equity, and risk-taking. The unique features of banking emphasized the interconnectedness to the broader economy. The statistical package for social sciences (SPSS) was used to perform these analyses. It was found that as executive remuneration in the form of cash increased, risk-taking decreased. In addition, as executive remuneration in the form of equity decreased, risk-taking increased. In summary, the research points to the fact that executives have in fact been remunerated in terms of equity. However, the results indicate that this may not have enticed the executives to take on more risks

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Section: Model Diagnosticsmentioning

confidence: 96%

“…This particular study focused on the empirical attractiveness of the Z-score, as it does not require strong assumptions about the distribution of ROA. In addition, Chiaramonte et al (2015) examined whether the Z-score was an accurate tool to predict bank distress on a sample of banks from 12 European countries.…”

Section: Model Diagnosticsmentioning

confidence: 99%

The impact of executive remuneration on risk-taking in the banking industry

Swanepol

Smit

2016

Investment Management and Financial Innovations

View full text Add to dashboard Cite

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“…e authors observe that the estimates with accounting data for the Z-score may not generate good results. Chiaramonte, Croci, and Poli (2015) use the Z-score and evaluate that its popularity derives from the simplicity of computing it, requiring few data: Z-score = (ROA + Equity/Assets) /σ ROA . Chiaramonte, Croci, and Poli (2015) apply the Z-score indicator and the CAMELS system for a sample of European banks, concluding that the ability of that indicator is as good as the covariates of this system for identifying nancial distress events and more e ective when sophisticated business models are involved, as in the case of big banks.…”

Section: Financial Institutions and The Camels Systemmentioning

confidence: 99%

“…Chiaramonte, Croci, and Poli (2015) use the Z-score and evaluate that its popularity derives from the simplicity of computing it, requiring few data: Z-score = (ROA + Equity/Assets) /σ ROA . Chiaramonte, Croci, and Poli (2015) apply the Z-score indicator and the CAMELS system for a sample of European banks, concluding that the ability of that indicator is as good as the covariates of this system for identifying nancial distress events and more e ective when sophisticated business models are involved, as in the case of big banks. e authors argue that other measures such as the distance-to-default from Merton (1974) and credit default swaps prices are unviable for use in the presence of banks that are not listed on stock exchanges.…”

Section: Financial Institutions and The Camels Systemmentioning

confidence: 99%

“…Complementarily, the performance of the Z-score model was evaluated, in accordance with Chiaramonte, Croci, and Poli (2015), but with di erent results. A lower level of accuracy was obtained in relation to the model developed in this study, which confirms the observation by Boyd and Runkle (1993) regarding the critical performance of the Z-score for accounting data.…”

Section: Signsmentioning

confidence: 99%

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Financial distress in Brazilian banks: an early warning model,

Rosa

Gartner

2017

Rev. contab. finanç.

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ABSTRACTis study aims to propose an early warning model for predicting nancial distress events in Brazilian banking institutions. Initially, a set of economic-nancial indicators is evaluated, suggested by the risk management literature for identifying situations of bank insolvency and exclusively taking public information into account. For this, multivariate logistic regressions are performed, using as independent variables nancial indicators involving capital adequacy, asset quality, management quality, earnings, and liquidity. e empirical analysis was based on a sample of 142 nancial institutions, including privately and publicly held and state-owned companies, using monthly data from 2006 to 2014, which resulted in panel data with 12,136 observations. In the sample window there were nine cases of Brazilian Central Bank intervention or mergers and acquisitions motivated by nancial distress. e results were evaluated based on the estimation of the in-sample parameters, out-of-sample tests, and the early warning model signs for a 12-month forecast horizon. ese obtained true positive rates of 81%, 94%, and 89%, respectively. We conclude that typical balance-sheet indicators are relevant for the early warning signs of nancial distress in Brazilian banks, which contributes to the literature on nancial intermediary credit risk, especially from the perspective of bank supervisory agencies acting towards nancial stability.

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ESG controversies and bank risk taking

Galletta

Mazzù

2022

Bus Strat Env

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This study investigates how environmental, social, and governance controversies affect bank risk taking. By estimating a dynamic panel data model from 2011 to 2020, we find evidence that banks with fewer ESG controversies take less risk. Banks with a lower number of ESG controversies show their compliance with the implementation of ESG strategies to reduce risk, as evidenced by lower risk-weighted assets and higher Z-scores. The present study supports the recent guidelines on climaterelated and environmental risks published by the Basel Committee on Banking Supervision and the European Central Bank. Therefore, the main results strengthen the need for the integration not only of social and governance risks but also of climaterelated and environmental risks in banks' risk management framework.

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Should we trust the Z-score? Evidence from the European Banking Industry

Cited by 91 publications

References 38 publications

The impact of executive remuneration on risk-taking in the banking industry

The impact of executive remuneration on risk-taking in the banking industry

Financial distress in Brazilian banks: an early warning model,

ESG controversies and bank risk taking

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