Early warning models for bank supervision: Simpler could be better
Can computer-based models, using publicly available information, be used as off-site early
warning systems (EWS) to identify banks that will become inadequately capitalized in the near
future? The EWS models analyzed in this article are able to detect the early onset of financial
distress one year in advance with a reasonable degree of accuracy. Although simple EWS
models do as well as or better than more sophisticated ones, more sophisticated models could
provide more detailed information about individual bank strengths and weaknesses.
