Risk Management

, Volume 20, Issue 3, pp 242–257 | Cite as

In search of a measure of banking sector distress: empirical study of CESEE banking sectors

  • Paola Bongini
  • Małgorzata Iwanicz-DrozdowskaEmail author
  • Paweł Smaga
  • Bartosz Witkowski
Original Article


We tested the reliability of different versions of the Z-score and CAMELS-based financial strength indices (aggregated from bank-level data) in detecting periods of banking crisis on a sample of 20 Central, Eastern, and Southeastern European (CESEE) countries during 1995–2014. We demonstrated that the predictive power of both types of accounting-based measures is weak. Our results cast some doubt on their usefulness in academic research and in the macroprudential monitoring framework for emerging economies. Thus, there is a need to strengthen the informational content of accounting data through more frequent and higher-quality data disclosures, including exposures allowing for analysis of interconnectedness and network effects for systemic banking risk monitoring.


Financial strength Z-Score CAMELS Crisis 



This work was supported by the Polish National Science Center (NCN) under Grant number UM0-2014/13/B/HS4/01619. The opinions expressed herein are those of the authors and do not reflect those of the associated institutions.


  1. Adrian, T., and M.K. Brunnermeier. 2016. CoVaR. American Economic Review 106 (7): 1705–1741.CrossRefGoogle Scholar
  2. Altunbas, Y., Manganelli, S. and Marques-Ibanez, D. 2011. Bank risk during the financial crisis do business models matter? ECB working paper 1394.Google Scholar
  3. Babecký, J., T. Havrinek, U.J. Matej, M. Rusnak, K. Smidkova, and B. VaSiéek. 2014. Banking, debt, and currency crises in developed countries: stylized facts and early warning indicators. Journal of Financial Stability 15: 1–17.CrossRefGoogle Scholar
  4. Beck, T. and Laeven, L. 2006. Resolution of failed banks by deposit insurers: Cross-country evidence. World Bank policy paper 3920.Google Scholar
  5. Bertay, A.C., A. Demirgüç-Kunt, and H. Huizinga. 2013. Do we need big banks? Evidence on performance, strategy and market discipline. Journal of Financial Intermediation 22 (4): 532–558.CrossRefGoogle Scholar
  6. Bongini, P., S. Claessens, and G. Ferri. 2001. The political economy of distress in East Asian financial institutions. Journal of Financial Services Research 19: 5–25.CrossRefGoogle Scholar
  7. Bongini, P., and L. Nieri. 2014. Identifying and regulating systemically important financial institutions. Economic Notes 43: 39–62.CrossRefGoogle Scholar
  8. Borio, C. and Drehmann, M. 2009. Assessing the risk of banking crisesrevisited. BIS Quarterly Review March: 29–46.Google Scholar
  9. Borio, C. and Lowe, P. 2002. Assessing the risk of banking crises. BIS Quarterly Review December: 43–54.Google Scholar
  10. Boyd, J., De Nicola, G. and Jalal, A. 2006. Bank risk-taking and competition revisited: New theory and new evidence. IMF working paper 06/297. Washington, DC: IMF.Google Scholar
  11. Boyd, J.H. and Graham, S.L. 1986. Risk, regulation and banking holding company expansion into nonbanking. Quarterly Review Spr: 2–17.Google Scholar
  12. Caprio, G., and D. Klingebiel. 2003. Episodes of systemic and borderline financial crises. Washington, DC: World Bank.Google Scholar
  13. Cardarelli, R., S. Elekdag, and S. Lall. 2011. Financial stress and economic contractions. Journal of Financial Stability 7: 78–97.CrossRefGoogle Scholar
  14. Castrèn, O., and M. Rancan. 2014. Macro networks: An application to euro area financial accounts. Journal of Banking & Finance 46: 43–58.CrossRefGoogle Scholar
  15. Cevik, E.I., S. Dibooglu, and A.M. Kutan. 2013. Measuring financial stress in transition economies. Journal of Financial Stability 9 (4): 597–611.CrossRefGoogle Scholar
  16. Chaudron, R. and de Haan, J. 2014. Identifying and dating systemic banking crises using incidence and size of bank failures. DNB working paper no. 406. Oslo: DNB.Google Scholar
  17. Chiaramonte, L., and B. Casu. 2013. The determinants of bank CDS: Evidence from the financial crisis. European Journal of Finance 19: 861–887.CrossRefGoogle Scholar
  18. Chiaramonte, L., E. Croci, and F. Polk. 2015. Should we trust the Z-score? Evidence from the European banking industry. Global Finance Journal 28: 111–131.CrossRefGoogle Scholar
  19. Čihák, M., and K. Schaeck. 2010. How well do aggregate prudential ratios identify banking system problems? Journal of Financial Stability 6 (3): 130–144.CrossRefGoogle Scholar
  20. Cimini, R. 2015. Eurozone network “connectedness” after fiscal year 2008. Finance Research Letters 14: 160–166.CrossRefGoogle Scholar
  21. Cole, R.A., and J.W. Gunther. 1998. Predicting bank failures: A comparison of on- and off-site monitoring systems. Journal of Financial Services Research 13: 103.CrossRefGoogle Scholar
  22. Constantinos, S. 2010. Rethinking market discipline in banking: Lessons from the financial crisis. Policy research working papers 5227. Washington, DC: World Bank.Google Scholar
  23. Costa Navajas, M. and Thegeya, A. 2013. Financial soundness indicators and banking crises. IMF working paper WP/13/263. Washington, DC: IMF.Google Scholar
  24. Davis, P.E., and D. Karim. 2008. Comparing early warning systems for banking crises. Journal of Financial Stability 4 (2): 89–120.CrossRefGoogle Scholar
  25. Demirgüç-Kunt, A., and E. Detragiache. 2000. Monitoring banking sector fragility: a multivariate logit approach with an application to the 1996-97 banking crisis. World Bank Economic Review 14 (2): 287–307.CrossRefGoogle Scholar
  26. Demirgüç-Kunt, A. and Detragiache, E. (2005) Cross-country empirical studies of systemic bank distress. A survey. IMF Working Paper WP/05/96. Washington, DC: IMF.Google Scholar
  27. Demirgüç-Kunt, A., E. Detragiache, and T. Tressel. 2008. Banking on the principles: Compliance with Basel Core Principles and bank soundness. Journal of Financial Intermediation 17 (4): 511–542.CrossRefGoogle Scholar
  28. Demirgüç-Kunt, A., E. Kane, and L. Laeven. 2015. Deposit insurance around the world: A comprehensive analysis and database. Journal of Financial Stability 20: 155–183.CrossRefGoogle Scholar
  29. Dietrich, D., T. Knedlik, and A. Lindner. 2011. Central and Eastern European countries in the global financial crisis: a typical twin crisis? Post-Communist Economies 23 (4): 415–432.CrossRefGoogle Scholar
  30. Drehmann, M. and Juselius, M. 2013. Evaluating early warning indicators of banking crises: Satisfying policy requirements. BIS working paper series no. 421. Basel: BIS.Google Scholar
  31. ECB. 2016. Recent trends in euro area banks’ business models and implications for banking sector stability. Financial Stability Review, May 2016.Google Scholar
  32. Flannery, M.J. 1998. Using market information in prudential banking supervision. A review of US evidence. Journal of Money, Credit and Banking 30: 273–305.CrossRefGoogle Scholar
  33. Foos, D., L. Norden, and M. Weber. 2010. Loan growth and riskiness of banks. Journal of Banking & Finance 34 (12): 2929–2940.CrossRefGoogle Scholar
  34. FSB. 2011. Policy measures to address systemically important financial institutions. Basel: FSB.Google Scholar
  35. Geršl, A. and Heřmánek, J. 2006. Financial stability indicators: Advantages and disadvantages of their use in the assessment of financial system stability. Financial stability report. Basel: CNB.Google Scholar
  36. Ginevičius, R., and A. Podviezko. 2013. The evaluation of financial stability and soundness of Lithuanian banks. Ekonomska istralivanja 26 (2): 191–208.CrossRefGoogle Scholar
  37. Goldstein, M., G.L. Kaminsky, and C.M. Reinhart. 2000. Assessing financial vulnerability: An early warning system for emerging markets. Washington, DC: Peterson Institute.Google Scholar
  38. Green, D., and K. Petrick (eds.). 2002. Banking and financial stability in Central Europe. Integrating transition economies into the European Union. Cheltenham: Edward Elgar.Google Scholar
  39. Gropp, R., Vesala, J. and Vulpes, G. 2002. Equity and bond market signals as leading indicators of bank fragility. ECB working paper series 150. Basel: ECB.Google Scholar
  40. Hagendorff, J., and P. Kato. 2010. Distance to default, subordinated debt, and distress indicators in the banking industry. Accounting and Finance 50: 853–870.CrossRefGoogle Scholar
  41. Hagendorff, J., and F. Vallascas. 2011. CEO pay incentives and risk-taking: Evidence from bank acquisitions. Journal of Corporate Finance 4: 1078–1095.CrossRefGoogle Scholar
  42. Hannan, T.H., and G.A. Hanweck. 1988. Bank insolvency risk and the market for large certificates of deposit. Journal of Money, Credit and Banking 20: 203–211.CrossRefGoogle Scholar
  43. Hesse, H. and Čihák, M. (2007) Cooperative banks and financial stability. IMF working paper WP/07/2. Basel: IMF.Google Scholar
  44. Holló, D., Lo Duca, M. and Kremer, M. 2012. CISSA composite indicator of systemic stress in the financial system. ECB working paper series no. 1426. Basel: ECB.Google Scholar
  45. Iwanicz-Drozdowska, M., Smaga, P. and Witkowski, B. 2016. Bank restructuring in the EU. Which way to go? Journal of Policy Modeling 38 (3): 572–586.CrossRefGoogle Scholar
  46. Jahn, N. and Kick, T. 2012. Early warning indicators for the German banking system: A macroprudential analysis. Bundesbank discussion paper No. 27/2012. Frankfurt: Bundesbank.Google Scholar
  47. Joy, M., Rusnak, M., Šmídková, K. and Vašíček, B. 2015. Banking and currency crises: Differential diagnostics for developed countries. ECB working paper series no. 1810. Basel: ECB.Google Scholar
  48. Kaminsky, G., and C. Reinhart. 1999. The twin crises: The causes of banking and balance-of-payments problems. American Economic Review 89 (3): 473–500.CrossRefGoogle Scholar
  49. Klomp, J., and J. de Haan. 2012. Banking risk and regulation: Does one size fit all? Journal of Banking & Finance 36 (12): 3197–3212.CrossRefGoogle Scholar
  50. Laeven, L., and R. Levine. 2009. Bank governance, regulation and risk taking. Journal of Financial Economics 93: 259–275.CrossRefGoogle Scholar
  51. Laeven, L. and Valencia, F. 2012. Systemic banking crises database: An update. IMF working paper WP/12/163. Basel: IMF.Google Scholar
  52. Lepetit, L., and F. Strobel. 2013. Bank insolvency risk and time-varying Z-score measures. Journal of International Financial Markets, Institutions and Money 25: 73–87.CrossRefGoogle Scholar
  53. Lepetit, L., and F. Strobel. 2015. Bank insolvency risk and Z-score measures: A refinement. Finance Research Letters 13: 214–224.CrossRefGoogle Scholar
  54. Lopez, J.A. 1999. Using CAMELS ratings to monitor bank conditions. Economic letter no. 19. San Francisco: Federal Reserve Bank of San Francisco.Google Scholar
  55. Maecheler, A., Srobona, M. and DeLisle, W. 2007. Decomposing financial risks and vulnerabilities in Eastern Europe. IMF Working Paper 248. Basel: IMF.Google Scholar
  56. Männasoo, K., and D.G. Mayes. 2009. Explaining bank distress in Eastern European transition economies. Journal of Banking & Finance 33 (2): 244–253.CrossRefGoogle Scholar
  57. Minoiu, C., and J.A. Reyes. 2013. A network analysis of global banking: 1978-2010. Journal of financial stability 9: 168–184.CrossRefGoogle Scholar
  58. Morgan, D. and Stiroh, K. 2001. Bond market discipline of bank: Is the market tough enough? Working paper no. 95. New York: Federal Reserve Bank of New York.Google Scholar
  59. Petrovska, M., and E.M. Mihajlovska. 2013. Measures of financial stability in Macedonia. Journal of Central Banking Theory and Practice 2 (3): 85–110.Google Scholar
  60. Poghosyan, T., and M. Čihák. 2011. Distress in European banks: An analysis based on a new dataset. Journal of Financial Services Research 40: 163–184.CrossRefGoogle Scholar
  61. Sinkey, J. 1979. Problem and failed institutions in the commercial banking industry. Contemporary studies in economic and financial analysis, vol. 4. Amsterdam: JAI Press.Google Scholar
  62. Sironi, A. 2000. Testing for market discipline in the European banking industry: Evidence from subordinated debt spreads. Finance and economics discussion series no. 40. Washington, DC: Board of Governors of the Federal Reserve System.Google Scholar
  63. Slingenberg, J.W. and de Haan, J. 2011. Forecasting financial stress. Working paper no. 292. Amsterdam: De Nederlandsche Bank.Google Scholar
  64. Suhr, D.D. 2005. Principal component analysis vs. exploratory factor analysis. Paper 203-30, SUGI 30 Proceedings. Greeley: University of Northern Colorado.Google Scholar
  65. Sundararajan, V., Enoch, C., San Jose, A., Hilbers, P., Krueger, R., Moretti, M. and Slack, G. 2002. Financial soundness indicators: Analytical aspects and country practices. IMF Occasional Paper No. 212. Washington, DC: IMF.Google Scholar
  66. Vermeulen, R., M. Hoeberichts, B. Vašíček, D. Žigraiová, K. Šmídková, and J. de Haan. 2015. Financial stress indices and financial crises. Open Economies Review 26: 383–406.CrossRefGoogle Scholar
  67. Volz, M., and M. Wedow. 2011. Market discipline and too-big-to-fail in the CDS market: Does banks’ size reduce market discipline? Journal of Empirical Finance 18: 195–210.CrossRefGoogle Scholar
  68. Wong, J., T.-Ch. Wong, and P. Leung. 2010. Predicting banking distress in the EMEAP economies. Journal of Financial Stability 6 (3): 169–179.CrossRefGoogle Scholar
  69. Yeyati, E.L., and A. Micco. 2007. Concentration and foreign penetration in Latin American banking sectors: impact of competition and risk. Journal of Banking & Finance 31: 1633–1647.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd., part of Springer Nature 2018

Authors and Affiliations

  • Paola Bongini
    • 1
  • Małgorzata Iwanicz-Drozdowska
    • 2
    Email author
  • Paweł Smaga
    • 3
  • Bartosz Witkowski
    • 2
  1. 1.Milan-Bicocca UniversityMilanItaly
  2. 2.Warsaw School of EconomicsWarsawPoland
  3. 3.Warsaw School of Economics and National Bank of PolandWarsawPoland

Personalised recommendations