Innovative Empirical Model for Predicting National Banks’ Financial Failure with Artificial Intelligence Subset Data Analysis in the United States

Karina Kasztelnik

doi:10.1515/openec-2020-0106

Abstract

Abstract The principal objective of this research study was to investigate the impact of the Great Economic Recession of 2008 on national banks’ equity investment valuations and create an empirical model for predicting national banks’ financial failure in the United States. The focal period of the study was from 2009 to 2012, and public data sources used. It is not known to what extent national banks’ stock value investments are based on the return on equity. This causal-comparative study explores the degree to which national banks’ value investment in terms of the price to earnings ratio impacts their return on equity and the extent to which these banks’ stock value investment in terms of dividend yield impacts their return on equity. We used statistical modeling and the machine learning model to find hidden patterns in the input data. The principal finding of this research is that the median earnings per share in 2012 and the dividend yield in 2009 were significantly larger than the median return on equity in 2009 and 2012. Additionally, the dividend yield in 2012 was significantly smaller than the median return on equity in 2012. These findings can contribute to improving our understanding of how banks can predict financial failure using the new machine learning features of artificial intelligence to build an early warning system with the innovative risk measurement tool.

Highlights

In this research article, we develop an innovative model to measure possible contagion bank risk, which is defined as the risk that an initial bank failure may spill over to the rest of the banking industry and cause further bank failures
One can ask if the Great Economic Recession had any influence on the return on equity (ROE) in the U.S This study examines the impact of the Great Economic Recession from 1998 to 2018 on stock value investment based on the ROE in the U.S The focus of this study is institutions that are federally insured by the Federal Deposit Insurance Corporation (FDIC), because of the role that it played during the Great Economic Recession
The practical implications suggest that this new potential ratio (EPS/ROE) could become a new risk indicator for predicting bank failures for the central bank in the U.S The findings showed that the median of DividendYield2009 (Mdn = 0.02) was significantly larger than that of ROE2009 (Mdn = 0.00)

Summary

Introduction

We develop an innovative model to measure possible contagion bank risk, which is defined as the risk that an initial bank failure may spill over to the rest of the banking industry and cause further bank failures. The purpose of this study is to assess the impact of the Great Economic Recession of 2008 on national banks’ stock value investment based on the reported ROE and create an empirical model for predicting national bank financial failures in the United States. While the post-World War II period’s growth showed higher volatility in economic growth after a period of low growth, the most recent downturn (2008 to 2015) showed a weaker period of growth (Khanal & Mishra, 2017). This trend seems unique in the historical data

Objectives

Discussion

Conclusion