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In Rememberance: World Trade Center (WTC)

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The Contribution of On-site Examination Ratings to an Empirical Model of Bank Failures

by David C. Wheelock of the Federal Reserve Bank of St. Louis, and
Paul W. Wilson of the University of Texas

November 1999

Abstract: This paper investigates how well regulator examinations predict bank failures, and how best to incorporate examination information into an econometric model of time-to-failure. We estimate proportional hazard models with time-varying covariates and find that examiner ratings help explain the failure hazard. Both the overall rating of a bank's condition and management, i.e., the composite CAMELS rating, and ratings of specific components contain information. In addition, we find that the marginal "effect" of ratings is non-linear, in that the impact of a rating downgrade on the probability of failure is larger, the weaker a bank's initial rating.

Published in: Review of Accounting and Finance, Vol. 4, No. 4, (November 2005), pp. 110-34.

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