Forecasting Bank Solvency: An Emphasis on Loan Quality

Abstract

We propose a method for forecasting bank solvency that quantifies bank solvency as the probability that a bank will have more than 0.25 of the cash to total asset ratio. Predictor variables include the ratio of loans secured by farmland to total loans, the ratio of loans to farmers to total loans, and the ratio of commercial and industrial loans to total loans. Loans secured by farmland to total loans significantly predicted the potential for insolvency. To a secondary extent, commercial and industrial loans significantly predicted bank failure. This result was validated with predicted probabilities significantly explaining cash to total assets.

Citation

Abraham, R. and Harrington, C.W. (2011), "Forecasting Bank Solvency: An Emphasis on Loan Quality", Lawrence, K.D. and Klimberg, R.K. (Ed.) Advances in Business and Management Forecasting (Advances in Business and Management Forecasting, Vol. 8), Emerald Group Publishing Limited, Leeds, pp. 67-75. https://doi.org/10.1108/S1477-4070(2011)0000008008