Patrick Van Roy

Failure Prediction Models: Performance, Disagreements, and Internal Rating Systems

We address a number of comparative issues relating to the performance of failure prediction models for small, private firms. We use two models provided by vendors, a model developed by the National Bank of Belgium, and the Altman Z-score model to investigate model power, the extent of disagreement between models in the ranking of firms, and the design of internal rating systems. We also examine the potential gains from combining the output of multiple models. We find that the power of all four models in predicting bankruptcies is very good at the one-year horizon, even though not all of the models were developed using bankruptcy data and the models use different statistical methodologies. Disagreements in firm rankings are nevertheless significant across models, and model choice will have an impact on loan pricing and origination decisions. We find that it is possible to realize important gains from combining models with similar power. In addition, we show that it can also be beneficial to combine a weaker model with a stronger one if disagreements across models with respect to failing firms are high enough. Finally, the number of classes in an internal rating system appears to be more important than the distribution of borrowers across classes.

Ten years after the financial crisis: Regulatory reforms and the Belgian Banking Sector

This article reviews the experience of the 2007-2008 financial crisis and the principal regulatory reforms that followed, at the international, European and Belgian levels. These reforms have included increases in minimum regulatory capital requirements for banks, improvement of the quality of capital held by banks, broadening of the risks for which bank capital requirements are imposed, introduction of liquidity regulation for banks, introduction of macroprudential policies, and development of frameworks to facilitate the resolution of failed banks without the use of taxpayer funds.Changes in the Belgian banking sector in the ten years following the crisis are examined, and the following outcomes are observed: the size of banks has diminished; leverage has decreased; banks have returned to their core businesses, concentrating on domestic lending; banks’ trading activities have been reduced; holdings of government debt as a proportion of total assets have increased; dependence on wholesale funding has fallen. Most of these developments reflect an enhanced resilience of the banking sector.