Predicting European Bank Distress: Evidence from the Recent Financial Crisis

Based on a sample of active and non-active banks operating in four areas of specialization: commercial banks, co-operative banks, savings banks and real estate and mortgage banks, belonging to 12 European countries over the period 2001-2011, this paper examines whether the Z-score is indeed a valuable measure to predict bank distress. Additionally, in order to verify whether the predictive power of the Z-score varies before and during the recent crisis, the sample period is further split into two sub-periods: the pre-crisis period (2001–2007) and the crisis years (2008–2011). The results of the empirical analysis indicate that the Z-score is a key determinant of the probability of bank distress in all the sample periods considered. In addition, the paper finds that complementing the Z-score with indicators for bank size and bank risk improves the model performance, only during the whole period and the crisis years. The contribution of macro-variables results basically insignificant.