Should we trust the Z-score? Evidence from the European Banking Industry

Ettore Croci, Federica Poli, Laura Chiaramonte

Research output: Contribution to journalArticlepeer-review

34 Citations (Scopus)

Abstract

We investigate the accuracy of the Z-score, a widely used proxy of bank soundness, on a sample of European banks from 12 countries over the period 2001–2011. Specifically, we run a horse race analysis between the Z-score and the CAMELS related covariates. Using probit and complementary log–logmodels, we find that the Z-score's ability to identify distress events, both in the whole period and during the crisis years (2008–2011), is at least as good as the CAMELS variables, but with the advantage of being less data demanding. Finally, the Z-score proves to be more effectivewhen bank businessmodelsmay be more sophisticated as it is the case for large and commercial banks.
Original languageEnglish
Pages (from-to)111-131
Number of pages21
JournalGlobal Finance Journal
DOIs
Publication statusPublished - 2015

Keywords

  • Bank distress
  • Camels
  • Financial crisis
  • Z-score

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