How accurately can Z-score predict bank failure?

Chiaramonte, L., Liu, (F.) H., Poli, F. and Zhou, M. (2016) How accurately can Z-score predict bank failure? Financial Markets, Institutions and Instruments, 25(5), pp. 333-360. (doi: 10.1111/fmii.12077)

Abstract

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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Liu, Professor Frank
• Authors: Chiaramonte, L., Liu, (F.) H., Poli, F., and Zhou, M.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Financial Markets, Institutions and Instruments
• Publisher: Wiley
• ISSN: 0963-8008
• ISSN (Online): 1468-0416
• Published Online: 14 November 2016
• Copyright Holders: Copyright © 2016 Wiley
• First Published: First published in Financial Markets, Institutions & Instruments 25(5):333-360
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher