The Role of Financial Ratios in Building Bank Failure Anticipation Model
Bank failure is the major challenge for central bank and market regulators. The main focus is modeling bank failure: measurement bank failure. Much Research has focused on bank failure because of an increase in the incidence of bank crisis. This paper examines the adequate of financial ratios to provide early warning signal for bank failure on the basis of financial statements. The idea is to compare failed and nonfailed banks. A sam ple has been drawn from the Jordanian banking sector based on certain criteria that the bank should be licensed by central bank of Jordan (CBJ), financial statements of failed banks shall be available for five years prior to revoke license date, and nonfailed banks shall have financial statements, without gap during the period 2000-2004. This paper intends to find the predictive power of two model, the non parametric approach of Trait Recognition and Du Pont ROI model as instrument of financial control, in providing an early warning for revealing potential financial difficulties that may lead to failure. The paper found that the Trait Recognition approach performs well in terms of classification accuracy in the nonfailed banks with rate of 100%, but the classification accuracy in the failed bank was 83%for holdout sample. As well, the motivated Trait Recognition approach is accurate in classification between failed and nonfailed banks, the accuracy in the nonfailed banks is 100% and also in failed banks is 100%. The Du Pont ROI approach illustrates the financial performance of the nonfailed and failed banks, where the ROI of nonfailed bank was positive but the failed bank was negative. (original abstract)
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