Confidence-based measures for the assessment of bank financial distress

We will introduce estimation error in the evaluation of banks’ financial health/soundness. The use of such approach in this context is novel and we expect that it will overcome a limitation of one of the leading methods used in the literature.

Our main objective is to establish the foundation of a long-term project as this grant will be essential for the next steps of our research programme when we will expand our analyses to systemic risk (contagion of failures among financial institutions) and will apply for large grants.

This venture fund will cover costs related to the salary of a research assistant to collect data, network with a practitioner, and teaching (tutorial) replacement of the applicants who will use this time to write computer codes, analyse the pertinent data, and write a paper.

1 - Working paper. We have written a working paper (in collaboration with Dr Roberto Rossi - UEBS, MSBE Group) and we are currently running the final empirical tests on our model. Once we have finalised these (in around one month), the paper will be submitted to the European Journal of Operational Research (ABS 4).
2 - Distress event database. We have built (with the support of a Research Assistant) a database containing details on 100 financial distress events in European banks. This hand-collected database is unique and therefore it is a valuable resource for our future research and grant applications. Other data mentioned in our proposal was also collected: stock prices, accounting information and credit default swap spreads.
3 – Internal dissemination. Our initial findings were presented at two internal (UEBS) events: an MSBE Group Seminar and a one-day workshop organised by the Credit Research Centre. The latter event was mainly attended by practitioners from the financial market and this has helped us increase the visibility of our work.
We and Dr Roberto Rossi had lunch with Michael Middlemiss from Sainsbury’s Bank when we discussed the importance of our research to financial institutions and relevant topics for future studies.
4 – External dissemination 1. Our initial results were presented at the CRC Credit Scoring and Credit Control XIV conference (Edinburgh, 26th - 28th August 2015). We had a positive feedback from the audience and received some suggestions with regard to alternative sources of information concerning financial distress.

5 – External dissemination 2. Our findings were also presented at the 5th International Conference of the Financial Engineering and Banking Society – FEBS (Nantes/France, 11th - 13th June 2015) where we were able to discuss with some delegates several methods to measure financial distress and the challenges faced by researchers in this area (especially the limitation regarding data availability, which is a key motivation of the model we are proposing).
6 – Graphical tool. We have developed an interactive graphical tool for the visualisation of the model we are proposing. This tool, created with the help from Dr Roberto Rossi and a Research Assistant, will be posted online as soon as we publish our results.