Forecasting the Fragility of the Banking and Insurance Sector

29 Pages Posted: 12 Jul 2009

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Andreas Pick

Erasmus University Rotterdam (EUR) - Department of Econometrics; De Nederlandsche Bank

Date Written: April 2009

Abstract

This paper considers the issue of forecasting financial fragility of banks and insurances using a panel data set of performance indicators, namely distance-to-default, taking unobserved common factors into account. We show that common factors are important in the performance of banks and insurances, analyze the influences of a number of observable factors on banking and insurance performance, and evaluate the forecasts from our model. We find that taking unobserved common factors into account reduces the the root mean square forecasts error of firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based only on observed variables. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.

Keywords: Financial stability, financial linkages, banking, insurances, unobserved common factors, forecasting

JEL Classification: C53, G21, G22

Suggested Citation

Bernoth, Kerstin and Pick, Andreas, Forecasting the Fragility of the Banking and Insurance Sector (April 2009). DIW Berlin Discussion Paper No. 882, Available at SSRN: https://ssrn.com/abstract=1432389 or http://dx.doi.org/10.2139/ssrn.1432389

Kerstin Bernoth (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Andreas Pick

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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