An Application of CAMELS and Z-Score Methodologies in a Comparative Analysis Between the Four Systemic Banks in Greece for the Period 2006-2016

An Application of CAMELS and Z-Score Methodologies in a Comparative Analysis Between the Four Systemic Banks in Greece for the Period 2006-2016

Apostolos G. Christopoulos
Copyright: © 2019 |Pages: 20
DOI: 10.4018/IJCFA.2019010102
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Abstract

Τhe recent crisis which accelerated after the collapse of Lehman Brothers in 2008 revealed that relationships between the real economy and the financial sector are decisive for the stability of the world economy, even in in cases of well operating banking systems operating in competitive economies. In the present article, the authors focus on Greece, the weakest member of the Eurozone, but with a financial system which seemed to operate on a sound basis, avoiding initially the effects of the US financial crisis. The goal of this article is to examine the performance of the Greek banking sector for the critical decade before and after the crisis, assessing the financial position of the four systemic Greek banks for the period 2006-2016. For this purpose, two alternative methods, CAMELS and Z-scores, are applied, comparing the results obtained from the two methodologies. As expected, the results of both methodologies show that the failure risk during the crisis period 2011-2016 for the four systemic banks was significantly higher compared to the pre-crisis period 2006-2010.
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1. Introduction And Literature Review

The economies of several countries, even in the euro area, were deteriorated after the USA crisis in 2008 as indices, debt-to-GDP and deficit-to-GDP, worsen dramatically. In 2009, the newly elected socialist government in Greece publicized that the deficit-to-GDP ratio of the country was over 16% instead of the 4% which was officially reported by the conservative administration. The need for a bailout was inevitable and the so-called Troika (ECB, EC and the IMF) came to fill-in the funding needs of the country as the markets did not trust the Greek securities to invest. In return, Greece had to follow the implemented austerity programs set by the Troika. However, the sovereign crises turned into a banking a crisis as there was a massive withdrawal of deposits and an outstanding increase of Non-Performing Loans. Although Greece is only a small member state within the euro area, the adoption of the Euro currency implies certain obligations for all member states. Nevertheless, several recent studies show that the impact of bad news about Greece has effect in all euro area economies.

Polyzos, Abdulrahman and Christopoulos (2018) examine a series of banking crises in the USA and Europe. To test the determinant factors for bank viability they employ an agent-based model in distressed periods. Their investigation covers both management and financial factors which affect institutions’ capability to overpass difficult periods. The findings of their predicting risk model are in line with previous studies. Magnis and Iatridis (2017) use banks from the USA, UK, Germany and France to investigate manipulation issues in banks based on two dimensions, the earnings and capital management. They find that auditor reputation restricts the motivation for earnings manipulation while they also prove that banks in the post–Basle II period limit earnings and capital adequacy management. Ladas, A., Negkakis and Samara (2017) use a sample of banks from the Eurozone countries to examine the relationship between capital structure, stock crash-risk and deferred taxation. To do so they apply stock crash risk measures and they find that the recording of deferred tax components can lead to capital structure and to future stock crash risk. They also show that banks with high deferred tax assets have lower future stock crash risk in the case of crisis-affected countries, implying that deferred tax can reflect better future stock crash. Finally, banks domiciled in crisis-affected countries with capital-structure problems and high deferred tax assets have more possibilities of future crash risk.

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