Possibilities of Using Econometric Models in Bank Analysis

The first commercial bank in Estonia, which was also the first commercial bank in the former Soviet Union, was established in Tartu in 1988. Unfortunately, because of bad loans, Tartu Commercial Bank went bankrupt and was liquidated in 1993. During the transition period after Estonia regained independence a large number of banks were set up, sometimes quite thoughtlessly. Many of these went bankrupt mainly due to mismanagement. The relatively rapid economic development resulted in an ever increasing demand for banking services, and several banks that had been rather small at first (Union Bank of Estonia, Hansabank) saw vigorous growth. Although the Estonian kroon was introduced already in 1992, we can speak about Estonian banking system only since 1995, when the banking system stabilised. The period 1995ñ2002 is too short for analysing the time series on the yearly data; for this reason the time series are built up on the basis of quarterly data. The present paper is part of a planned series of papers discussing possibilities of using econometric models for analysing banking systems as well as for prognosticating their development. The paper analyses trends in the development of the Estonian banking system and suggests a two-factor regression model. Total income was chosen as the output (dependent) variable, and fixed assets, earning assets, liabilities and equity were used as the factors (explanatory variables).