Contribution of Macroeconomic Factors to the Prediction of Small Bank Failures

Microprudential regulation is an integral part of the banking supervisory framework. By analysing the link between economic conditions and the survival of small cooperative banks, this study sheds some further light on the importance of the economic environment once we assess individual bank stability over time. The results show that bank failure is better captured when we account for the state of the economy both at the national and the regional level. Our findings have important policy implications. First, the usage of a wider spectrum of information in default predicting models lessens the dependency of off-site monitoring on accounting data. Second, capital requirements for small local banks should account for the overall risk in tune with the application of capital buffers. Third, adverse economic conditions may increase the likelihood of observing joint bank failures particularly in the cooperative banking sector