Bank failure prediction models: for the developing and developed countries

Banks make good use of capital and have characteristics different from profit businesses. Mismanagement causes collapse, which negatively affects investors, depositors, and employees, and disrupts economic order. Consequences may also affect other industries, triggering financial distress. Therefore, evaluating operational risks in banks and developing an early warning system are critical. This study evaluates data from 858 international banks (including banking holding companies) from 2005 to 2008 and applies a logistic model to analyze critical factors. Results show that equity-to-assets (ETA) and interest income – interest expense/income (NIN) had negative relationships with financial distress. Banks accept deposits and make loans. A higher proportion of NIN shows stable business volume, which could avert financial distress. Therefore, ETA and NIN were indicative of banking financial distress and best predicted trends in Association of Southeast Asian Nations (ASEAN) and European Union (EU) banks.