The Determinants of Bank Failure: the Evidence from Ukraine and Russia

Abstract: The purpose of this essay is to investigate which financial ratios are significant in the prediction of bank failure for the sample of Russian and Ukrainian banks and to see if there any similar ratios, which drive the bank to bankruptcy in both countries for the first decade of this century. As an instrument for our analysis we use the linear probability and the binary choice models. They are used to analyze the significance of different financial ratios drawn from the publicly available annual balance sheets for the period 2002-2008. For the Ukrainian sample the capitalization and profitability measures influence the bank failure negatively, as well as a size of the bank. For the sample of Russian banks, the return on assets and the loans to total assets ratios are found to have a negative influence on the default, in contrast to the capitalization, which positively influence the bankruptcy according to the estimated coefficients. Moreover, we conclude that despite some similarities, the differences exist in determinants of the banks to failure in two countries; hence the regulatory policy of central banks on the local levels still remains the most important for the healthy functioning of the banking sector.