Mikko Mäkinen and Laura Solanko (BOFIT): Determinants of bank closures: Do changes of CAMEL variables matter?

Mikko Mäkinen and Laura Solanko (BOFIT): Determinants of bank closures: Do changes of CAMEL variables matter?

Abstract

This paper examines determinants of bank closures in a large emerging economy, Russia. Using publicly available monthly data, we estimate linear probability models on bank license withdrawals since mid-2013. Where most previous literature relies on annual or quarterly data, our focus is on examining if high-frequency changes in bank-level financial data help to explain subsequent bank license withdrawals. We find that: (i) one month lagged levels of capital, earnings and liquidity significantly decrease the probability of bank closure in subsequent month, whereas in longer lags only the level of liquidity is significant; (ii) changes in CAMEL indicators are always significantly correlated with conditional probability of bank closure, and the magnitude of parameter estimates decreases with the lag length; and (iii) the importance of CAMEL indicators in explaining bank closures varies somewhat across small and large banks.

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