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A Comprehensive Analysis of European Banking Soundness – Theoretical Study

Journal: Financial Markets, Institutions and Risks (FMIR) (Vol.3, No. 2)

Publication Date:

Authors : ;

Page : 17-43

Keywords : Bank profitability; Soundness of banks; Inflation; CAMEL; Z-Score; Moody’s Rating; Basel III.;

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This research offers a comprehensive examination of bank soundness using qualitative and quantitative analyses, such as Moody's rating systems, CAMELS or CAMEL, Z-Score, prof-itability and others relying on available empirical studies, rating outlooks and reports. An ex-tensive assessment of collected data resulted in detailed analysis of quantitative methodolo-gies as well as the examination of the effectiveness of selected macroeconomic determinants to avoid the financial instability. It was noted that the Moody's structure for forecasting banks' failures and credit profiles accurately employed the macro profile qualitative approach. When external factors were added to the Z-score and CAMEL methodologies, the bank soundness predictions were generally improved, even though the change was deemed insignificant in some studies. The direct impact on European banks soundness caused by supervision regulations and regulatory bodies was also investigated. It is noted that the new regulatory measures call for new or adjusted calculations, which led to new requirements on data mining, data analysis, linking of data and quality of data. These new requirements will require IT-implementation and testing, of data aggregation and reporting, development of internal models and risk management improve-ment to reflect less risk-sensitive regulatory approaches. A comprehensive dynamic model rep-resents the structure of soundness of banks for the selected methodologies, and all possible factors and sub-factors that influence the soundness banks from the qualitative analysis point view.

Last modified: 2020-01-09 20:41:49