Bank distress prediction: Empirical evidence from the Gulf Cooperation Council countries

Aktham I. Maghyereh, Basel Awartani

Research output: Contribution to journalArticlepeer-review

47 Citations (Scopus)

Abstract

In this paper we apply a simple hazard model to develop an early warning system of bank distress in the Gulf Cooperation Council countries. Specifically, we identify a set of leading indicators of bank distress that are used subsequently to predict the probability of bank failure in these countries. The investigation covers a wide set of bank level variables and other variables including the influence of bank management, competition, diversification, ownership and regulation. Similar to the previous empirical evidence, we found that good management lowers the likelihood of distress. Moreover, competition and diversification were found to be bad for the health of banks. This result is consistent with some empirical evidence on diversification; however, it contradicts the bulk of literature on competition, which suggests a negative influence on the probability of distress. The ownership structure and the capital requirement index were uninformative. Similar to the previous literature, the institutional development index was statistically relevant predictor. The bank specific and other CAMEL type variables as well as the systematic shocks in the financial and macroeconomic environment were all found to be in line with the findings of related empirical studies. Finally, we find that by conditioning on the relevant covariates, a simple hazard model has performed fairly well in predicting bank distress in the GCC countries.

Original languageEnglish
Pages (from-to)126-147
Number of pages22
JournalResearch in International Business and Finance
Volume30
Issue number1
DOIs
Publication statusPublished - Jan 2014
Externally publishedYes

Keywords

  • Banks distress
  • Early warning systems
  • GCC banks
  • Hazard model

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Finance

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