Modeling of Banks' Resistance

<div>In this paper a model of banks&rsquo; stability was constructed. It concerns credit organizations&nbsp;</div><div>operating in the territory of the Russian Federation. It is based on indicators of the financial&nbsp;</div><div>statements. Classification trees method is used, implemented by the algorithm CART&nbsp;</div><div>(Classification and Regression Trees). Banks&rsquo; stability is understood as keeping a license on&nbsp;</div><div>conducting banking activities. Data for the study were provided by the news agency &quot;Mobile&quot;.&nbsp;</div><div>The data include more than 150 indicators of the financial statements of more than 1,000 banks&nbsp;</div><div>in the period from 1998 to 2012. All cases of licenses&rsquo; recalls were classified by the reasons&nbsp;</div><div>stated in the orders of revocation. Four cases of reasons were distinguished: financial&nbsp;</div><div>insolvency, money laundering, violating federal laws regulating banking activities, corruption.&nbsp;</div><div>Banks&rsquo; condition was analyzed during the last 4 years of their lives by annual indicators and the&nbsp;</div><div>last year of their lives by monthly variables.&nbsp;</div><div>Before implementation of calculations, five hypotheses (scenarios) as a set of indicators&nbsp;</div><div>characterizing the unstable state of a bank were formulated. They were confirmed by examples&nbsp;</div><div>from the real life. First, a small bank has unconventionally high figure of cash, high capital and&nbsp;</div><div>low long-term liquidity ratio. Second, a small bank is also characterized by high values of&nbsp;</div><div>monetary assets, but the capital is small, or even negative, shortly before the license revocation&nbsp;</div><div>an increase in loans and deposits occurs. Third, the bank engages in money laundering and uses&nbsp;</div><div>non-resident banks to transfer assets by means of deposits and loans. Fourth: credit portfolio&nbsp;</div><div>growth in combination with high rates on deposits of individuals. In order to disguise the&nbsp;</div><div>reporting banks sometimes evaluate their assets as reliable, but create large reserves. They can&nbsp;</div><div>also exchange bad assets on the securities. Finally, the fifth: high share of securities and low&nbsp;</div><div>turnover on them. This situation will cause suspicion as banks profit from securities through their&nbsp;</div><div>buying and selling. If the turnover is small, then the securities may be of poor quality. The first&nbsp;</div><div>four hypotheses were confirmed by the results of calculations. In addition, other indicators&nbsp;</div><div>characterizing banks&rsquo; instability have been identified. Closed banks have high values of other&nbsp;</div><div>expenses and other income from banking operations. Banks which licenses were deprived for&nbsp;</div><div>economic reasons, had very little funds in the correspondent account with the CBR. They are&nbsp;</div><div>also characterized by low instant liquidity ratio.&nbsp;</div><div>&nbsp;</div>