CROSS-COUNTRY STUDY ON THE DETERMINANTS OF BANK FINANCIAL DISTRESS

Bank failures affect owners, employees, and customers, possibly causing large-scale economic distress. Thus, banks must evaluate operational risks and develop early warning systems. This study investigates bank failures in the Organization for Economic Co-operation and Development, the North America Free Trade Area (NAFTA), the Association of Southeast Asian Nations, the European Union, newly industrialized countries, the G20, and the G8. We use financial ratios to analyze and explore the appropriateness of prediction models. Results show that capital ratios, interest income compared to interest expenses, non-interest income compared to non-interest expenses, return on equity, and provisions for loan losses have significantly negative correlations with bank failure. However, loan ratios, non-performing loans, and fixed assets all have significantly positive correlations with bank failure. In addition, the accuracy of the logistic model for banks from NAFTA countries provides the best prediction accuracy regarding bank failure.

KEYWORDS
Bank failure prediction; bank; distress; global; cross-country

	OECD	NAFTA	ASEAN	EU	NIC	G20	G8
CAPITAL_j,t	12%	11%	9.7%	9. 9%	8.2%	9.5%	9.2%
LOAN_j,t	42%	39%	47%	40%	46%	35%	37%
NPL_j,t	41%	46%	42%	40%	45%	41%	43%
PL_j,t	44%	45%	51%	49%	52%	51%	47%
FA_j,t	52%	54%	47%	41%	39%	45%	47%
ROE_j,t	12%	10%	14%	15%	8%	9%	7%
IIE_j,t	125%	146%	158%	138%	168%	147%	149%
NINIE_j,t	142%	119%	122%	132%	127%	122%	126%
RGDP_j,t	-1.52%	-1.17%	2.89%	-1.12%	1.89%	-0.79%	-0.82%
STOCK_j,t	1.55	1.79	2.55	2.36	3.37	1.05	2.55
CPI_j,t	0.84%	0.58%	2.09%	0.91%	2.58%	0.45%	0.52%
Samples	1758	355	471	1572	858	936	823

	OECD	NAFTA	ASEAN	EU	NIC	G20	G8
Intercept	-1.058^* ***** significant at 1%	-4.538	2.252^* ***** significant at 1%	0.276	1.621^* ***** significant at 1%	1.193^* ***** significant at 1%	-1.5266^* ***** significant at 1%
CAPITAL_j,t	0.021	-0.667	-1.478^ significant at 5%	-0.382	-1.917^ significant at 5%	-1.552^ significant at 5%	-1.981^ significant at 5%
LOAN_j,t	-0.075	2.675^* ***** significant at 1%	2.817 ^* ***** significant at 1%	1.117^* ***** significant at 1%	1.623^* * significant at 10%.	0.047	-1.55
NPL^j,t	9.567^* ***** significant at 1%	2.135^* ***** significant at 1%	1.529^* ***** significant at 1%	1.419^* ***** significant at 1%	1.677^* * significant at 10%.	-0.658	1.028
PL^j,t	-0.218 ^* * significant at 10%.	0.115	0.085	-1.212^* ***** significant at 1%	-0.812 ^ significant at 5%	-1.209^ significant at 5%	-1.659^* ***** significant at 1%
FA^j,t	0.019	-0.029	0.119^* * significant at 10%.	0.018	0.957^ significant at 5%	-0.133	0.891 ^* * significant at 10%.
ROE^j,t	-1.179^ significant at 5%	1.037	0.387	-0.126	0.379	1.239	-0.572
IIIE^j,t	-1.655^* ***** significant at 1%	0.015	0.076	-0.438	-3.176	-2.213^ significant at 5%	-1.897 ^* ***** significant at 1%
NINIE_j,t	-4.627^ significant at 5%	0.672	-0.092	-0.676	0.062	-2.156^* ***** significant at 1%	-2.039^* ***** significant at 1%
RGDP_j,t	2.8072 ^* ***** significant at 1%	0.326	_-2.l39^* ***** significant at 1%	-0.485	0.135	1.066^ significant at 5%	0.487 ^ significant at 5%
STOCK_j,t	2.106^* ***** significant at 1%	1.732^* ***** significant at 1%	1.417^* ***** significant at 1%	0.891 ^* * significant at 10%.	-1.937^ significant at 5%	-0.0457	-1.827 ^* ***** significant at 1%
CPI_j,t	1.035****	-0.029	0.039	1.199^ significant at 5%	-0.0929	-1.639^ significant at 5%	0.125
X2	77.155^* ***** significant at 1%	58.324 ^* ***** significant at 1%	81.757 ^* ***** significant at 1%	59.584 ^* ***** significant at 1%	57.336^* ***** significant at 1%	62.758 ^* ***** significant at 1%	61.472^* ***** significant at 1%
Cox and Snell R²	0.425	0.319	0.452	0.342	0.458	0.389	0.449
Nagelkerke R²	0.576	0.455	0.629	0.472	0.636	0.542	0.632
Sample	550	127	117	557	277	372	331
Sensitivity	0.416	0.571	0.538	0.439	0.542	0.544	0.552
Specificity	0.471	0.632	0.635	0.406	0.489	0.476	0.465
Overall predictive	0.449	0.598	0.581	0.420	0.516	0.513	0.511
ROC area	0.492	0.572	0.602	0.446	0.532	0.552	0.499

	OECD	NAFTA	ASEAN	EU	NIC	G20	G8
Intercept	1.538^* ***** significant at 1%	4.656	2.219^* ***** significant at 1%	-0.277	-1.659^* ***** significant at 1%	-1.117^* ***** significant at 1%	1.587^* ***** significant at 1%
CAPITAL_j,t	-0.019	0.655	-1.537^ significant at 5%	-0.375	-1.873^ significant at 5%	-1.472^ significant at 5%	-1.902^ significant at 5%
LOAN_j,t	0.077	2.682^* ***** significant at 1%	2.739^* ***** significant at 1%	1.105^* ***** significant at 1%	1.542^* * significant at 10%.	-0.037	1.59
NPL_j,t	9.672^* ***** significant at 1%	2.047^* ***** significant at 1%	1.491^* ***** significant at 1%	1.392^* ***** significant at 1%	1.574^* * significant at 10%.	0.638	-1.016
PL_j,t	-0.236^* * significant at 10%.	0.142	-0.085	-1.194^* ***** significant at 1%	-0.811^ significant at 5%	-1.209^ significant at 5%	-1.652^* ***** significant at 1%
FA_j,t	0.027	0.038	0.155^* * significant at 10%.	0.029	0.892^ significant at 5%	-0.136	0.901^* * significant at 10%.
ROE_j,t	-1.093^ significant at 5%	-1.032	0.419	-0.157	-0.399	1.259	-0.632
IIIE_j,t	-1.537^* ***** significant at 1%	-0.038	0.079	-0.418	3.192	-2.189^ significant at 5%	-1.935^* ***** significant at 1%
NINIE_j,t	-4.532^ significant at 5%	0.732	-0.112	0.671	-0.092	-2.035^* ***** significant at 1%	-2.132^* ***** significant at 1%
RGDP_j,t	2.832^* ***** significant at 1%	0.329	-2.131^* ***** significant at 1%	0.452	-0.117	1.018^ significant at 5%	0.4117^ significant at 5%
STOCK_j,t	2.0356^* ***** significant at 1%	1.614^* ***** significant at 1%	1.382^* ***** significant at 1%	0.772^* * significant at 10%.	-1.837^ significant at 5%	0.0432	-1.736^* ***** significant at 1%
CPI_j,t	1.091****	0.028	0.099	1.119^ significant at 5%	0.073	-1.832^ significant at 5%	0.118
X2	78.233^* ***** significant at 1%	62.017^* ***** significant at 1%	81.736^* ***** significant at 1%	59.127^* ***** significant at 1%	58.309^* ***** significant at 1%	61.737^* ***** significant at 1%	61.336^* ***** significant at 1%
Cox and Snell R²	0.445	0.355	0.452	0.359	0.461	0.382	0.482
Nagelkerke R²	0.579	0.471	0.646	0.477	0.619	0.518	0.652
Sample	621	108	105	432	262	411	352
Sensitivity	0.538	0.640	0.585	0.537	0.549	0.548	0.541
Specificity	0.591	0.552	0.594	0.555	0.525	0.522	0.539
Overall predictive	0.562	0.593	0.590	0.546	0.539	0.535	0.539
ROC area	0.517	0.564	0.607	0.599	0.568	0.581	0.495

	OECD	NAFTA	ASEAN	EU	NIC	G20	GS
Intercept	-1.3368^* ***** significant at 1%	4.1787	2.195^* ***** significant at 1%	0.294	-1.667^* ***** significant at 1%	-1.139^* ***** significant at 1%	1.575^* ***** significant at 1%
CAPITAL_j,t	-0.036	0.656	-1.539^ significant at 5%	0.417	-1.892^ significant at 5%	-1.477^ significant at 5%	-1.872^ significant at 5%
LOAN_j,t	-0.072	2.534^* ***** significant at 1%	2.719^* ***** significant at 1%	1.092^* ***** significant at 1%	1.587^* * significant at 10%.	0.049	-1.37
NPL_j,t	9.681^* ***** significant at 1%	2.062^* ***** significant at 1%	1.442^* ***** significant at 1%	1.389^* ***** significant at 1%	1.679^* * significant at 10%.	0.517	1.142
PL_j,t	-0.217^* * significant at 10%.	-0.136	-0.121	-1.152^* ***** significant at 1%	-0.799^ significant at 5%	-1.137^ significant at 5%	-1.671^* ***** significant at 1%
FA_j,t	0.055	-0.072	0.158^* * significant at 10%.	0.061	0.952^ significant at 5%	-0.131	0.872^* * significant at 10%.
ROE_j,t	-1.092^ significant at 5%	-1.039	0.417	-0.155	-0.377	1.192	-0.6515
IIIE_j,t	-1.538^* ***** significant at 1%	-0.019	0.078	-0.452	3.136	-2.162^ significant at 5%	-1.737^* ***** significant at 1%
NINIE_j,t	-4.552^ significant at 5%	0.612	-0.089	0.662	-0.077	-2.089^* ***** significant at 1%	-2.125^* ***** significant at 1%
RGDP_j,t	2.725^* ***** significant at 1%	0.302	-2.142^* ***** significant at 1%	0.482	-0.152	1.146^ significant at 5%	0.419^ significant at 5%
STOCK_j,t	2.002^* ***** significant at 1%	-1.619^* ***** significant at 1%	1.182^* ***** significant at 1%	0.732^* * significant at 10%.	-1.791^ significant at 5%	0.0531	-1.737^* ***** significant at 1%
CPI_j,t	1.039****	0.028	0.077	0.138^ significant at 5%	0.068	-1.638^ significant at 5%	-0.158
X2	77.366^* ***** significant at 1%	62.419^* ***** significant at 1%	85.329^* ***** significant at 1%	59.308^* ***** significant at 1%	55.327^* ***** significant at 1%	61.442^* ***** significant at 1%	60.779^* ***** significant at 1%
Cox and Snell R²	0.449	0.362	0.514	0.361	0.429	0.385	0.477
Nagelkerke R²	0.579	0.489	0.655	0.474	0.642	0.552	0.629
Sample	587	120	249	583	319	153	140
Sensitivity	0.521	0.475	0.468	0.524	0.527	0.549	0.549
Specificity	0.525	0.475	0.537	0.493	0.474	0.549	0.518
Overall predictive	0.523	0.475	0.502	0.510	0.502	0.549	0.536
ROC area	0.556	0.502	0.514	0.521	0.479	0.532	0.594

	OECD	NAFTA	ASEAN	EU	NIC	G20	G8
Panel A: before 2008
Sensitivity	0.542	0.444	0.645	0.562	0.534	0.596	0.568
Specificity	0.550	0.472	0.542	0.489	0.571	0.580	0.524
Overall predictive	0.546	0.460	0.600	0.526	0.551	0.588	0.547
Roc area	0.563	0.449	0.592	0.556	0.576	0.592	0.581
Panel B : after 2008
Sensitivity	0.534	0.394	0.571	0.526	0.547	0.526	0.532
Specificity	0.538	0.484	0.559	0.489	0.436	0.467	0.563
Overall predictive	0.536	0.438	0.565	0.509	0.579	0.497	0.547
ROC area	0.527	0.492	0.571	0.499	0.541	0.502	0.541

	OECD	NAFTA	ASEAN	EU	NIC	G20	G8
Panel A: before 2008
Sensitivity	0.491	0.520	0.514	0.478	0.548	0.472	0.552
Specificity	0.535	0.560	0.464	0.458	0.524	0.504	0.505
Overall predictive	0.512	0.540	0.492	0.469	0.536	0.488	0.529
ROC area	0.495	0.584	0.506	0.512	0.509	0.492	0.554
Panel B : after 2008
Sensitivity	0.520	0.576	0.333	0.549	0.578	0.476	0.487
Specificity	0.503	0.600	0.476	0.459	0.507	0.493	0.514
Overall predictive	0.512	0.586	0.405	0.506	0.540	0.484	0.500
ROC area	0.526	0.602	0.432	0.518	0.492	0.502	0.542

	OECD	NAFTA	ASEAN	EU	NIC	G20	G8
Panel A: before 2008
Sensitivity	0.496	0.462	0.477	0.517	0.556	0.524	0.523
Specificity	0.468	0.552	0.500	0.511	0.531	0.528	0.439
Overall predictive	0.483	0.509	0.489	0.514	0.543	0.526	0.482
ROC area	0.492	0.532	0.496	0.532	0.552	0.517	0.476
Panel B : after 2008
Sensitivity	0.489	0.576	0.480	0.514	0.525	0.587	0.480
Specificity	0.435	0.469	0.547	0.464	0.505	0.345	0.467
Overall predictive	0.462	0.523	0.518	0.488	0.516	0.493	0.472
ROC area	0.492	0.507	0.552	0.504	0.582	0.512	0.512

Fundação Getulio Vargas, Escola de Administração de Empresas de S.Paulo Av 9 de Julho, 2029, 01313-902 S. Paulo - SP Brasil, Tel.: (55 11) 3799-7999, Fax: (55 11) 3799-7871 - São Paulo - SP - Brazil
E-mail: rae@fgv.br

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[1] Note:

[TFN01] ^***
significant at 1%

[TFN02] ^**
significant at 5%

[TFN03] ^*
significant at 10%.