The Improvement of Early Warning Systems of Bank Failures

Today a significant reduction in the number of operating banks in the Russian banking sector is observed. It enhances the interest in early warning systems of financial insolvency. This research aims to reveal the leading indicators of bank failures for small and medium banks of Moscow region where the amount of bankruptcies is the highest. In addition, the task of determining the dependency of leading indicators from the less sensitive indicators of financial condition through the regression analysis is set. The results show that the leading indicators are indicators of the banking business efficiency - net interest margin and return on equity, which, in turn, have the inverse relationship with the main stability indicator - capital adequacy. This confirms the fact that the increase in the efficiency of banks caused by taking excessive risks leads to a drop in capital adequacy and, ultimately, to license revocation. The binary classifiers of estimating the bankruptcy probability, based on the revealed leading indicators, demonstrate a sufficiently high predictive ability. This proves the sustainability of the identified leading indicators in relation to the investigated bank cluster. The findings of this study can be used by the banking supervisory authority, as well as by commercial banks with a view to improving early warning systems of financial insolvency and bankruptcy.