Can anybody tell me that how to calculate z-score for a bank for each year if I have data on ROA and CAR for 8 consecutive years for that bank.
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Replies
Brad and Gaston are correct, the Z score is not for financial institutions -- at all. Regulated banks and financials have no equivalent , straightforward, analysis; and even the CAMELS used by the regulators is a composite that is too broad.The credit analyst (agency) approach is quite backward looking, so you are left with 'doing the work' to get at leading indicators for a financial institution. By that I mean a detailed analysis and scoring of multivarient factors over several time periods. There are many models and vendors, but no shortcuts.
I am unsure if you possess enough data for the calculation. Please check out the following links
http://bankinnovation.net/2010/07/using-z-score-to-manage-financial...
http://www.aaii.com/computerizedinvesting/article/the-altman-z-scor...
They both provide straight forward examples.
Best Regards,
Edward Hoffman
Hello Badar:
Related to the topic, and perhaps of interest. We have done some work on stress testing banks using a combination of extensive operational 'actuals', used to seed a validated model capable of applying both known historical and hypothetical shock scenarios that test a bank's ability to handle such shocks and indicate the potential impact on financial and operational ratios.
More details can be found at: http://www.simudyne.com/case_studies/stress-testing/
If this is of interest, please feel free to contact me directly.
Best Wishes,
David.
Re your comment Brad - Well then does anyone want to help me to assess the benefits on that basis instead
Brad Morris said:
Besides that question - can anyone tell me - do I need to understand z scores?
My ideas on the management of interest rate risk may revolutionise the sector but how do I convince them of that?
The maths can be found here if anyone is interested in helping out. The benefits extend far beyond banking....
http://ingram-school-illustrations.blogspot.com/
The economics is here:
http://macro-economic-deign.blogspot.com
Home page mostly.
A small number of people are swinging behind these ideas and wanting to make them happen.
Regards,
Edward
Z-score was designed for industrials, not banks. I doubt this can be adapted in any meaningful way to calculate the distress risk of a financial institution.
Badar, the Altman z-Score is not a suitable tool for banks and financial institutions as it was designed for trading companies and service companies. The formula in the z-Score are expecting factors like working capital (which banks dont have in the traditional sense), and the sales/assets measure for a bank is significantly different against a trading company.
For banks, you are best to examine their grading for bonds, or their portfolio, or the return on tier-1 capital, or the prices for the credit-default swaps.
Thanks// Brad M
We use Altman's Z Score as our measurement tool to assess a company's financial condition. It incorporates fundamental financial analysis, offers a consistent measurement methodology across all business segments, and an enhanced level of transparency by use of fully disclosed and open calculation model.
You can click through and follow the links to download our Z Score calculation input form. Sum2 Z Score