ESRI Discussion Paper Series No.349
Predicting the Probabilities of Default for Privately Held Banks: The Case of Shinkin Banks in Japan

Brahim Guizani
Faculté des Sciences Juridiques, Economiques et de Gestion de Jendouba, University of Jendouba
Wako Watanabe
Economic and Social Research Institute, Cabinet Office and Faculty of Business and Commerce
Keio University

Abstract

Using the statistical relationships between market values of banks’ assets and their volatilities that are implied from banks’ shareholders’ values of publicly held banks and their financial statement-based variables, which are used to compute banks’ probabilities of default, we conduct out of sample predictions for these two variables for the sample of privately held shinkin banks. We, then, use estimates of these two variables to compute shinkin banks’ probabilities of default. We find that estimated probabilities of default complement the regulatory capital adequacy ratio in identifying banks to fail in the near future.

JEL Classification: G21, G22
Keywords: probability of default, privately held bank


Structure of the whole text(PDF-Format 1 File)

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  2. page1
    Abstract
  3. page2
    1. Introduction
  4. page5
    2. Empirical Methodology
  5. page9
    3. Data
  6. page12
    4. Results
    1. page12
      4.1. Overall results
    2. page13
      4.2. Estimated PD, IPP and leverage for ex-post failed shinkin banks
  7. page17
    5. Conclusion
  8. page19
    References
  9. page21
    Tables
    1. page21
      Table 1. Independent Variables for Regressions of Logarithms of χ (Leverage) and σν(Volatility of the Market Value of Assets) and Their Definitions.
    2. page22
      Table 2. Descriptive Statistics of Stock Market Based Variables and Independent Variables Used for the Regressions of Logarithms of χ (Leverage) and σν (Volatility of the Market Value of Assets) for Listed Regional Banks
    3. page23
      Table 3. The Sample Size and the R-squared for Every Fiscal Year in the Sample Period of FY1989 through FY2016
    4. page24
      Table 4. Descriptive Statistics of Shareholder Value Implied Variables and Failure Risk Measures
    5. page25
      Table 5. The List of Failed Shinkin Banks
    6. page26
      Table 6. The values for the DD, the PD, the IPP, Leverage and the Capital Adequacy Ratio for Three Consecutive Fiscal Years Ending in the Last Year, for Which at Least IPP and Leverage Are Available, Leading to A Year of A Bank’s Failure: 19 Failed Shinkin Banks
  10. page30
    Figures
    1. page30
      Figure 1.1. The Trends of Aggregate PD
    2. page31
      Figure 1.2. The Trends of Aggregate IPP
    3. page32
      Figure 1.3. The Trends of Aggregate Leverage
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