Assessment of Banks Financial Stability: the Determination of Early Indicators of Bankruptcy

The study aims to identify financial indicators that can serve as a signal to the nearest bank failure. We examine a hand-collected and carefully compiled dataset which consists of financial ratios of 15 failed and 30 non-failed Russian commercial banks. The empirical analysis of credit institutions is carried out with the help of probit model which enables us to assess the significance and impact of independent variables on the risk of failure. We use a binary variable as the dependent which takes the value one (1) if a bank is bankrupt and zero (0) in the opposite case. The group of independent variables represented by nine ratios, namely the share of government participation, return on assets (ROA), the ratio of non-performing loans to total loan portfolio, ETA (the ratio of equity to assets), capital adequacy, the share of securities investments in total assets, the ratio of obligatory reserves to the loan portfolio, the share of interbank loans in bank liabilities and the share of government securities in total securities investments. It should be highlighted that the indicators are considered for one month before the license revocation. The results show that all previously listed coefficients with the exception of the ratio of obligatory reserves to the loan portfolio and the share of government securities in total securities investments strongly influence on likelihood of bank default. Prediction of bank insolvency using received indicators has the main benefit, namely the opportunity of diversification of depositors' assets in order to reduce their own risks. The results can be useful for banks to respond promptly and prevent bankruptcy.