Z-Altman's model effectiveness in bank failure prediction-The case of European banks

Abstract: The corporate bankruptcy is a significant problem for economy since it is considered as a limiting factor for economic growth. The financial crisis that broke out in USA on 2007 as a result of miscalculated subprime mortgage strategies turn into a full international banking crisis affecting successively the European banks, especially those of South European countries. Given that the role and the impact of the banks in the national and international economies are significant , it is vital for all interested economy stakeholders to constantly assess and measure the financial health of banks by use of reliable bankruptcy prediction models. This work includes a literature review of known prediction models for firm bankruptcy which are based on multivariate discriminant analysis. Additionally, it presents the findings of the empirical study implemented by use of Altman’s Z-score model specialized for firms from emerging markets. The main tasks carried out were: • Financial data analysis for “failed” banks located mostly in South European countries (GIIPS group) • Application of the above analysis outcome to benchmark the financial status of Central European banks that are still active The aim of this work was to examine the effectiveness and accuracy of Altman's Z-score model for measuring the financial health of banking sector organizations and answer the research question whether Altman’s specialized formula, for firms from emerging markets, could be used for banking sector organizations too. The findings of the empirical study, allows someone to claim that the accuracy and predictability of the tested Altman Z-score model, specialized for firms from emerging markets, is questionable as regards predictions for private firms operating with high leverage.