A Predictive Analytics Model to Identify Risky Banks

Bank examiners ensure that banks are managed in a safe and sound manner. By reviewing financial statements and internal bank policies and procedures, examiners evaluate a bank’s level of risk and adherence to federal and state banking laws. With roughly 4,500 banks in the United States, bank examiners must rely on off-site risk-modeling tools to monitor individual banks, particularly smaller institutions that do not have as frequent on-site examinations. The early detection of financial distress and/or failure of a bank can help stem losses and systemic contagion of losses throughout the financial system and save taxpayers from potential costly government bailouts. Based on discussions with bank examiners, community bankers, and financial system researchers, we use bank call reports, macroeconomic data, and other historical information to develop an early-warning predictive analytics model to detect individual bank weakness and potential vulnerability to failure.