This paper analyzes the drivers of financial distress experienced by small Italian cooperative banks during the latest deep recession. It mainly investigates the importance of bank capital as a predictor of bankruptcy for Italian nonprofit banks. The analysis aims to build an early-warning model suitable for this type of bank. The results reveal non-monotonic effects of bank capital on failure probability. In contrast to distress models for for-profit banks, non-performing loans, profitability, liquidity, and management quality have a negligible predictive value. The findings also show that unreserved impaired loans have an important impact on the probability of bank distress. Moreover, the ratio loan-loss provision on substandard loans constitutes a suitable antibody against bank distress. Overall, the results are robust in terms of both the methodology (i.e., frequentist and Bayesian approaches) and the sample used (i.e., cooperative banks in Italian and euro-area countries).

Forecasting distress in cooperative banks: The role of asset quality

Forgione, Antonio Fabio
Primo
;
Migliardo, Carlo
Ultimo
2018-01-01

Abstract

This paper analyzes the drivers of financial distress experienced by small Italian cooperative banks during the latest deep recession. It mainly investigates the importance of bank capital as a predictor of bankruptcy for Italian nonprofit banks. The analysis aims to build an early-warning model suitable for this type of bank. The results reveal non-monotonic effects of bank capital on failure probability. In contrast to distress models for for-profit banks, non-performing loans, profitability, liquidity, and management quality have a negligible predictive value. The findings also show that unreserved impaired loans have an important impact on the probability of bank distress. Moreover, the ratio loan-loss provision on substandard loans constitutes a suitable antibody against bank distress. Overall, the results are robust in terms of both the methodology (i.e., frequentist and Bayesian approaches) and the sample used (i.e., cooperative banks in Italian and euro-area countries).
2018
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11570/3128113
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