ESRI Discussion Paper Series No.349
Predicting the Probabilities of Default for Privately Held Banks: The Case of Shinkin Banks in Japan
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 statementbased 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
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page1Abstract

page21. Introduction

page52. Empirical Methodology

page93. Data

page124. Results

page124.1. Overall results

page134.2. Estimated PD, IPP and leverage for expost failed shinkin banks


page175. Conclusion

page19References

page21Tables

page21Table 1. Independent Variables for Regressions of Logarithms of χ (Leverage) and σν(Volatility of the Market Value of Assets) and Their Definitions.

page22Table 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

page23Table 3. The Sample Size and the Rsquared for Every Fiscal Year in the Sample Period of FY1989 through FY2016

page24Table 4. Descriptive Statistics of Shareholder Value Implied Variables and Failure Risk Measures

page25Table 5. The List of Failed Shinkin Banks

page26Table 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


page30Figures

page30Figure 1.1. The Trends of Aggregate PD

page31Figure 1.2. The Trends of Aggregate IPP

page32Figure 1.3. The Trends of Aggregate Leverage
