Predicting Banks' Financial Distress by Data Envelopment Analysis Model and CAMELS Indicators

Subject Areas : Business Strategy

Abass Paidar ¹ , Morteza Shafiee ² , Fariborz Avazzadeh ³ , Hashem Valipour ⁴

1 - Department of Accounting and Management, Yasuj Branch, Islamic Azad University, Yasuj, Iran
2 - Department of Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran
3 - Department of Accounting, Gachsaran Branch, Islamic Azad University, Gachsaran, Iran
4 - Department of Accounting, Firuzabad Branch, Islamic Azad,University, Firuzabad, Iran

Received: 2021-09-03 Accepted : 2021-11-22 Published : 2021-11-22

Keywords: Data envelopment analysis, Banking Supervision, Financial Distress Prediction, CAMELS Indices, Banking Health and Stability,

Abstract :

Due to their inherent nature in the economy, banks have a fundamental and significant responsibility for capital formation. Therefore, evaluating their performance can help decision makers find the optimal solution and prevent financial distress. The purpose of this study is to evaluate the performance and forecast financial distress of banks listed on the Tehran Stock Exchange, based on CAMELS indicators and ِData Envelopment Analysis model. First, using the data of 17 banks in the fiscal year 2018, 5 levels of determining the health of banks, in the form of differences between the performance of these banks in terms of capital adequacy, quality of assets, quality of management, Earning and liquidity and sensitivity to market risk, It was found. And the studied banks were divided into two groups: healthy and helpless, based on CAMELS indices. Then, according to the effects of financial distress on banks, financial distress was predicted by Data Envelopment Analysis model slacks-based on measure of efficiency (SBM) and with a different approach. The results show that 61% of the predictions were correct by DEA technique and 39% of them were incorrect. Also, the results of this study showed that CAMELS financial ratios can be a good assessor for banks' financial distress.

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