Publications:
Predicting Large U.S. Commercial Bank Failures
by James Kolari, Dennis Glennon, Hwan Shin, and Michele Caputo
Abstract
The present study applies empirical methods to the problem of predicting large U.S. commercial
bank failures. Because of sampling limitations, scant research has examined the feasibility of using
computer-based early warning systems (EWSs) to make such predictions. In the late 1980s and early
1990s numerous large banks failed in the United States, enabling us to collect a sample of 50 failed
banks with more than $250 million in assets as well as a matched sample of 50 non-failed large
banks. These samples were split into original and holdout samples of different sizes. Both the
parametric method of logit analysis and the nonparametric approach of trait recognition are employed
to (1) develop classification EWS models based on the original samples and (2) test the predictive
ability of these models using the holdout samples. Both logit and trait recognition performed well
in terms of classification results. However, over the holdout samples, trait recognition outperformed
logit in a variety of tests, including overall accuracy, large bank failure accuracy, weighted
efficiency scores, and stability using data from one year before, as well as two years before,
failure. Other results from the trait recognition models reveal that complex two- and three-variable
interactions between financial and accounting variables contain additional information about bank
risk not found in the individual variables themselves. We conclude that nonparametric EWSs can
provide valuable information about the future viability of large banks.
Disclaimer
As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and
do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the following citation:
Kolari, Glennon, Shin & Caputo, "Predicting Large U.S. Commercial Bank Failures," Office
of the Comptroller of the Currency, E&PA Working Paper 2000-1, January 2000.
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