Forecasting distress in cooperative banks: The role of asset quality

The results reveal non-monotonic effects of bank capital on the probability of failure. In contrast to distress models for for-profit banks, non-performing loans, profitability, liquidity, and management quality have a negligible predictive value. The findings also show that unreserved impaired loans have an important impact on the probability of bank distress. Moreover, the loan-loss ratio provision on substandard loans constitutes a suitable antibody against bank distress. Overall, the results are robust in terms of both the methodology (i.e., frequentist and Bayesian approaches) and the sample used (i.e., cooperative banks in Italy and euro-area countries).