Using Accounting Proxies of Proprietary FDIC Ratings to Predict Bank Failures and Enforcement Actions During the Recent Financial Crisis

Kerstein, Joseph; Kozberg, Anthony

doi:10.1177/2150129713478846

Cited by 42 publications

(35 citation statements)

References 14 publications

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“…Kumar & Sayani 3 Kerstein and Kozberg (2013) suggest that the components of the CAMEL model individually and collectively hold the capability of predicting bank failure in the US especially surrounding the recent financial crisis. Hanc (1998) evaluate the importance of various factors in the CAMEL model that cause financial distress to banks and find that internal factors determine the financial health of banks.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Gasbarro et al (2002) argues that analyzing soundness of banks during the financial crisis is a challenging task as most indicators of financial health deteriorate in turbulent times. Increased bank failures during 2008 and 2010 imply that financial crises may induce unprecedented changes to financial health of banks, which is not only detrimental to the investors but also affects the economy in general (Kerstein and Kozberg, 2013;Ng and Roychowdhury, 2013). CAMEL indicators and ratings are found to be the most effective determinants of bank failures during the 1985-1992 financial crisis (Cole andGunther, 1995, 1998;Thomson, 1992) and in 2009 (Cole and White, 2012).…”

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confidence: 99%

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Application of CAMEL model on the GCC Islamic Banks: 2008-2014

Kumar¹,

Sayani²

2015

JIBF

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Purpose-The purpose of this paper is to evaluate the soundness of Islamic banks in the GCC for the period 2008 to 2014. Methodology-The study involves 11 listed Islamic banks based in the GCC countries of Saudi Arabia, United Arab Emirates, Qatar, Bahrain, and Kuwait. The study applied the CAMEL parameters, which include capital adequacy, asset quality, management capability, earning ability, and liquidity ratio. Multivariate Z-score model is also used to ensure robustness of the results. Findings-The findings suggest that although the Islamic banks in the GCC have adequate capital, their asset quality and earning ability have deteriorated over the period of study. However, the impact was not so significant that these banks will be pushed to the brink of bankruptcy. Practical implications-The information is of interest to stakeholders, who is concerned about the soundness of the banking sector in general, as any negative impact on the financial sector may have enormous implications for the country, which was indeed evident in the recent financial crisis. Insight into these elements provides a focus for management of the bank, by identifying areas that need attention.

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Section: Literature Reviewmentioning

confidence: 99%

mentioning

confidence: 99%

Application of CAMEL model on the GCC Islamic Banks: 2008-2014

Kumar¹,

Sayani²

2015

JIBF

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“…Equity is a buffer between losses and insolvency when a bank loses money. During the recent financial crisis, failed banks had roughly half the equity cushion of surviving banks (Kerstein & Kozberg, 2013). Bank profitability has been operationalized as the financial statement ratios return on assets (ROA) and return on equity (ROE).…”

Section: Introductionmentioning

confidence: 99%

The Profitability and Performance Measurement of U.S. Regional Banks Using the Predictive Focus of the “Fundamental Analysis Research”

Growe¹,

DeBruine²,

Maldonado³

2014

Advances in Management Accounting

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Purpose À This paper examines the profitability and performance measurement of U.S. regional banks during the period 1994À2011, using the GMM estimator technique. Our study extends prior research by including several factors not previously considered using U.S. data.Approach À We use bank-specific, industry-specific, and macroeconomic determinants of profitability contemporaneous with our performance indicators. We follow the accounting fundamental analysis path in explaining the bank performance.Findings À Among the performance measures, the efficiency ratio and provisions for credit losses are negatively and equity scaled by assets is positively related to profitability. However, these relationships either reverse (efficiency ratio and provisions for credit losses) or become insignificant (equity scaled by assets) when the target becomes change in profitability. The level of nonperforming assets is negatively related to profitability across all measures of profitability used. Macroeconomic variables are largely unrelated to profitability during the year they are measured. However, they have a significant relationship with earnings change measures, suggesting they have a lagged effect on profitability. The slope of the yield curve is especially strong in this regard.Originality À We use our determinants to model changes in bank profitability one year ahead, in addition to including several factors not previously considered, using the predictive focus of the fundamental analysis research.Keywords: Banking profitability; return on assets (ROA); return on equity (ROE); efficiency ratio; macroeconomic factors; fundamental analysis research LITERATURE REVIEWWe review the literature on the determinants of bank profitability. Because of its widespread acceptance, for the sake of conciseness, and to facilitate comparisons across studies, we cite ROA results unless otherwise specified. We will also describe the approach of fundamental analysis to earnings prediction. Geographic Scope of Banking Profitability StudiesSeveral studies have focused on bank profitability in individual countries. Single country studies are of

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“…In Appendix VI, we provide a case study that illustrates the source of the Academic studies that have examined the usefulness of CAMELS indicators in predicting bank failures have, by and large, found that they do contain useful information (e.g., Tam and Kiang 1992;Bongini, Claessens and Ferri 2001;Kerstein and Kozberg 2013;Betz, Oprică, Peltonen and Sarlin 2014). Note that these studies do not have the actual CAMELS scores computed by regulators (which are not released).…”

Section: Silver State Bank: a Case Studymentioning

confidence: 99%

Loan Portfolio Risk and Capital Adequacy: A New Approach to Evaluating the Riskiness of Banks

2019

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We develop a Loan Portfolio Risk (LPR) variable that measures timevarying volatility in default risk for a portfolio of bank loans. An Equity-to-LPR ratio (ELPR) is incrementally important in predicting bank failure up to five years in advance, even after controlling for all the CAMELS variables. Publicly-listed banks with higher ELPR have lower market implied costs-of-capital. ELPR also strongly predicts cross-sectional stock returns under stress conditions. During the financial crisis (7/2007-6/2011), a cash-neutral strategy that longs high-ELPR and shorts low-ELPR banks yields a monthly alpha of 3.3% to 4.2%. We conclude LPR captures key aspects of bank risk missed by a risk-weighted-asset approach.

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Using Accounting Proxies of Proprietary FDIC Ratings to Predict Bank Failures and Enforcement Actions During the Recent Financial Crisis

Cited by 42 publications

References 14 publications

Application of CAMEL model on the GCC Islamic Banks: 2008-2014

Application of CAMEL model on the GCC Islamic Banks: 2008-2014

The Profitability and Performance Measurement of U.S. Regional Banks Using the Predictive Focus of the “Fundamental Analysis Research”

Loan Portfolio Risk and Capital Adequacy: A New Approach to Evaluating the Riskiness of Banks

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