Methods of Estimation of Financial Sustainability of Commercial Bank

<p>The current period of 2012-2014 is characterized by numerous bank defaults and license revocations in the Russian banking sector. According to statistics there were about 108 bank failures. This unstable environment rouses our interest therefore we intend to investigate the reasons of rapid growth of bank failures.</p><p>When we started the process of examining the scope of our investigation we had discovered the lack of clearly defined rules for calculating and determining the financial soundness of banks. Therefore, this paper studies the major existing methods for assessing the financial stability of commercial banks and their application in practice.</p><p>The purpose of the paper is to analyze the financial stability of Russian banks through the econometric model of the bank default and to determine the financial and macroeconomic factors that contribute positive of negative effect to the sustainability of commercial banks.</p><p>In order to achieve this goal, we have solved a number of tasks. Firstly, our study focuses on methods for assessing the financial soundness of the banks. We have considered two basic methods: economic and econometric one. Secondly with the use of techniques by the CBR, foreign and Russian sources, we have developed a set of explanatory variables for inclusion them to the model. They are divided into financial and macroeconomic indicators. Thirdly, in the part of the model construction and the results anticipated, we have formulated a number of proposals for the CBR in order to strengthen supervision of the banking sector.</p><p>&nbsp;Study involves the examination of the topic from the perspective of the theory and the practice. In the theoretical section we have provided a notion of what the financial stability is and how it is defined and have studied two main methods of assessing the financial soundness of the banks, economic and econometric.</p><p>The first is a compilation of methodologies of the Bank of Russia which are related to the calculation of mandatory ratios of banks. This analysis is necessary to produce a set of financial ratios that are used in the practical part of the paper. Theoretically banking indicators are divided into four criteria: capital adequacy, assets valuation, liquidity and profitability of the banks. The second method is an econometric model of the binary probability of the bank default, which we have co provided by the construction of financial and macroeconomic indicators that were the reason of the bank failures in 2012-2014.</p><p>While constructing the model we have found that including into the regression macroeconomic indicators significantly increase its relevance. After selecting the best regression it has been found that the following indicators have a positive effect on the probability of the default: income from currency transactions, the profit after tax, credits to individual, the oil price, the dollar exchange rate, the outflow of capital from the country. The negative dependency has been discovered between the probability of the default and assets with zero risk, the equity, n1, n3, return on assets, loan loss provisions. Our expectations about the relationship between a dependent variable and the explanatory coefficients have been justified by 75%.</p><p>The obtained results after the construction of the model have shown that the banking sector is now faced with the high currency and credit risks. The problem of banking regulation now stands not only at the level of the financial system, but also at the macro level. In the first quarter of 2014 high fluctuations in the dollar exchange rate and the weakening of the ruble hit the banking system.</p><p>It would be appropriate to tighten supervision by the CBR not only under the regulatory measures, but also on credit bank policies. And the introduction of capital requirements of Basel 3 is a necessary measure to improve the stability of commercial banks.</p>