The Contribution of On‐Site Examination Ratings to an Empirical Model of Bank Failures

Abstract

This paper investigates how well regulator examinations predict bank failures and how best to incorporate examination information into an econometric model of time‐to‐failure. We estimate proportional hazard models with time‐varying covariates and find that examiner ratings help explain the failure hazard. Both the overall rating of a bank's condition and management, i.e., the composite CAMELS rating, and ratings of specific components contain information. In addition, we find that the marginal “effect” of ratings is non‐linear, in that the impact of a rating downgrade on the hazard is larger, the weaker a bank's initial rating.

Citation

Wheelock, D.C. and Wilso, P.W. (2005), "The Contribution of On‐Site Examination Ratings to an Empirical Model of Bank Failures", Review of Accounting and Finance, Vol. 4 No. 4, pp. 110-133. https://doi.org/10.1108/eb043440