Bankruptcy in Banks from Ecuador: Solvency versus Panic Theories

2005. International Finance Review. Vol. 5, Pp 231-247

Carlos Maquieira V, Franco Parisi F, Antonino Parisi F

Abstract:

This chapter develops a Probit model that identifies the financial variables explaining the bankruptcy of banking institutions in Ecuador as a function of efficiency, assets, capital, risk and operating income. The implications of this study verify the validity of the solvency theory over the self-fulfilled panic speculations. The criteria used was a high Pseudo R2 and an as high as possible Efficiency Index. The model yielded a Pseudo R2 of 89.14% and an Efficiency Index of 96.7%. The model is useful in preventing bankruptcy of a bank one year in advance.

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