Prediction of Bank Failures Using Combined Micro and Macro Data

by Chung-Hua Shen of National Cheng Chi University, and
Meng-Fen Hsieh of VanNung Institute of Technology

June 11, 2004

Abstract: Despite increasing evidence that banking crisis are brought about by changes in both micro factors and the macro environment. Few researchers have conducted empirical studies which systematically examine the concurrent contributions of these changes. This research combines micro and macro approaches, thus devising a modified early warning system it possible to monitor the individual banking distress f five severely crisis-hit Asian countries, namely, Indonesia, Malaysia, Thailand, Korea and the Philippines. Actual data on distressed banks are collected from existing literature, albeit little, and from web sites. Subsequently, the robust macro and micro prudential indicators as well as the fragile indicators are re-examined.

Since researchers have recently found that ownership is an important factor affecting business performance, the structure of ownership – divided into two variables – is also considered. First, ownership structure is considered with state-owned banks expected to have a higher tendency to default by the definition of economic failed. Next, connected and independent banks are differentiated to identify the moral hazard.

JEL Classification: E44, G21.

Keywords: banking system, bank failure, ownership, CAMEL.

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