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Journal of Regulatory Economics

, Volume 50, Issue 1, pp 38–69 | Cite as

Forecasting bank leverage: an alternative to regulatory early warning models

  • Gerhard Hambusch
  • Sherrill ShafferEmail author
Original Article
  • 427 Downloads

Abstract

Bank regulators have worked to develop statistical models predicting bank failures, but such models cannot be estimated during periods of few failures. We address this problem using an alternative approach, forecasting the leverage ratio as a continuous variable that avoids the small sample problem. The leverage ratio is a natural choice in this setting both because of its historically consistent ability to predict failures and because of regulators’ primary focus on bank capitalization. Our model selection draws on both the earlier literature and more recent stress-testing studies. Out-of-sample performance shows promise as a supplement to the standard approach.

Keywords

Bank leverage Early warning Forecasting Bank supervision 

JEL Classification

G21 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Finance Discipline Group, UTS Business SchoolUniversity of Technology SydneyBroadwayAustralia
  2. 2.Centre for Applied Macroeconomic AnalysisAustralian National UniversityCanberraAustralia
  3. 3.Quantitative Finance Research CentreUniversity of Technology SydneyBroadwayAustralia
  4. 4.Department 3985 (Economics & Finance)University of WyomingLaramieUSA

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