Russian Banks Financial Stability Loss Diagnostic: Multidimensional Logit-Model Approach

Abstract

The financial stability of the banking sector characterizes the "economic health" at the national and global levels and its deterioration is a cause of financial crises. Improving the toolkit for early diagnosis of financial problems is a key element of monitoring and forecasting banking risks. The purpose of the study is to examine the specific features of intrabank factors influencing the risk of financial stability loss in Russian banks. The research hypotheses are as follows: 1) the highly significant predictors of bank's financial instability risk are return on assets and overdue loans; 2) the impact degree of financial stability factors differs for medium- and long-term horizons of risk forecasting. The authors present multidimensional logit models for estimating the probability of the loss of financial stability by banks for 6 and 12 months based on four variables: capital adequacy ratio, overdue loans fraction over 90 days, return on assets, current liquidity ratio. It was revealed that a growth of return on assets has a positive significant effect on financial stability, and an increase in overdue loans has a negative significant effect on a bank's "financial immunity". It is shown the impact degree of financial stability factors is varied for different forecast horizons: the return on assets is a more relevant factor for 6 months, and the overdue loans fraction is more important for a 12 month period. The theoretical significance consists in better scientific understanding of factors impacting on a bank's financial stability. The practical significance lies in the possibility for commercial banks to use econometric models and conclusions in analytical and risk-predictive algorithms.