In search of a measure of banking sector distress: empirical study of CESEE banking sectors

We tested the reliability of different versions of the Z-score and CAMELS-based financial strength indices (aggregated from bank-level data) in detecting periods of banking crisis on a sample of 20 Central, Eastern, and Southeastern European (CESEE) countries during 1995-2014. We demonstrated that the predictive power of both types of accounting-based measures is weak. Our results cast some doubt on their usefulness in academic research and in the macroprudential monitoring framework for emerging economies. Thus, there is a need to strengthen the informational content of accounting data through more frequent and higher-quality data disclosures, including exposures allowing for analysis of interconnectedness and network effects for systemic banking risk monitoring.