Early Warning Systems

The purpose of this paper is to examine the determinants of the timing of bank failure/merger in 10 Asian countries over the period of 1999-2007 using a multivariate logit model and a split population duration analysis. Apart from bank-specific information, we also focus on the effects of macroeconomic and financial characteristics. The following empirical findings are obtained. First, the results based on the logit model and parametric survival time regressions (Weibull) indicate that individual bank factors such as asset quality, liquidity, earnings, as well as macroeconomic and financial characteristics, namely real interest rates, inflation and the ratio of M2 to foreign exchange reserves are important in explaining the likelihood and timing of bank failure. Second, using a split-population duration model, the evidence further demonstrates that relative timing had a significantly positive influence on the probability of bank failure during the 1999-2007 periods. The study also mentions that not all variables, which explain the probability of failure, are useful to explain the timing of failure. Additionally, these results confirm that bank liquidity, earnings, and macroeconomic environment significantly affect the likelihood and timing of bank failure. JEL Classification: E44, G21, N25