Predicting US bank failures: A comparison of logit and data mining models

Abstract

AbstractPredicting bank failures is important as it enables bank regulators to take timely actions to prevent bank failures or reduce the cost of rescuing banks. This paper compares the logit model and data mining models in the prediction of bank failures in the USA between 2002 and 2010 using levels and rates of change of 16 financial ratios based on a cross‐section sample. The models are estimated for the in‐sample period 2002–2009, while data for the year 2010 are used for out‐of‐sample tests. The results suggest that the logit model predicts bank failures in‐sample less precisely than data mining models, but produces fewer missed failures and false alarms out‐of‐sample.