Analysis of Bank Failure Using Published Financial Statements: The Case of Indonesia (Part 1)

10.6339/JDS.2003.01(2).118

Loso Judijanto；E. V. Khmaladze

Bank failure ； ranks

Journal of Data Science

1卷2期（2003 / 05 / 01）

199 - 230

英文

Published financial statement is the only publicly available report on financial condition of a bank operating in Indonesia. It contains limited information, but we want to exploit it to discriminate between normal, problem, and liquidated banks and to find factors underlying these conditions.We observed 213 banks and analyzed 32 initial variables representing earning and profitability, productivity and efficiency, quality of assets, capital adequacy, growth and aggressiveness, credibility, size, income and source of fund diversification, liquidity, and dependence on affiliates.In the classification we used ranks of each variable rather than its numerical value as such. After making necessary transformations, creating new variables and deleting unnecessary variables, we found that the ranks of 12 variables out of initial 32 could discriminate three groups of banks significantly two years before failure while the ranks of just two variables could discriminate significantly one year before failure.In this first paper we outline our approach and consider variables describing earning and profitability, productivity and efficiency and quality of assets. In the second paper we continue the analysis of other variables. Then we show that, for good discrimination, it is sufficient to select seven basic aspects of financial structure and performance of a bank, which can be efficiently and consistently measured by the variables of simple and clear intuitive meaning (see the list of abbreviations below in the text). These are: efficiency in productivity and earning (ranks of EBT/SE, PM, ROE and ROEA), capital adequacy (ranks of E/EA and E/L), interest gap (ranks of IM and NII/L), credibility (ranks of ARCF), liquidity (ranks of LA/D), dependence on affiliates (ranks of NFA/L), and security of earning assets (ranks of PLL/L).