The adaptation of Altman's corporate bankruptcy prediction model to banks and thrifts and development of a banking model: A comparative analysis

The base theory for the present study on bank failure prediction was built on the use of financial ratios. Financial ratios are useful in predicting business failures and improve the predictive accuracy of statistical models. Various modeling techniques were assessed and Altman's multiple discriminant analysis was chosen. His original 1968 bankruptcy model achieved a high degree of accuracy in predicting corporate failure. In 1993, Altman revised his original model for non manufacturers to minimize the effect of specific industries and included privately held corporations.; This study adapted Altman's revised 1993 model to banking, additionally, it developed a new model with variables specific to banking and then compared the two. A significant difference was found when the two models were tested and validated using a holdout sample two years prior to failure. The developed model achieved a higher level of overall predictive accuracy when it classified failed and nonfailed banks and thrifts.; The samples in this study were 132 failed and nonfailed banks and thrifts. Data were collected between 1994 and 2003, 1 and 2 years prior to failure. This information was collected and published financial data.