How accurately can Z-score predict bank failure?
journal contributionposted on 06.02.2020 by Laura Chiaramonte, Hong Liu, Federica Poli, Mingming Zhou
Any type of content formally published in an academic journal, usually following a peer-review process.
Bank risk is not directly observable, so empirical research relies on indirect measures. We evaluate how well Z‐score, the widely used accounting‐based measure of bank distance to default, can predict bank failure. Using the U.S. commercial banks’ data from 2004 to 2012, we find that on average, Z‐score can predict 76% of bank failure, and additional set of other bank‐ and macro‐level variables do not increase this predictability level. We also find that the prediction power of Z‐score to predict bank default remains stable within the three‐year forward window.
- Business and Economics