Assessment of bank financial health in Latvia

Abstract

Financially strong, trustworthy and reliable banks form the basis of every economy and are a vital precondition for the stable economic development of every country. The financial health of banks is important for different stakeholders, including bank clients, correspondent banks, state and others. Therefore, lack of appropriate measures for bank financial health can cause a number of risks for the bank stakeholders. Traditionally the assessment of bank financial health and reliability is done by the international rating agencies as Standard & Poor’s, Moody’s and Fitch. These ratings are widely recognized worldwide; however, due to different reasons ratings assigned by the international rating agencies historically are not available for the majority of European banks. Besides, after the global financial crisis of 2008 the number of banks with a rating by an international rating agency has substantially decreased. Therefore, the aim of the paper is to design a model allowing to assess bank financial health using publicly available information. The proposed model is based on the analysis of financial statements data of Latvian commercial banks in the period from 2003 till 2017, key macroeconomic indicators, and aggregate statistical data of Latvian commercial banks managed by the Financial and Capital Market Commission (FCMC). The methodology is based on the design of multiple choice model ordered logit using eViews 7.0. The paper determines the main factors affecting the bank financial health based on the Moody`s Investors Service Long Term Bank Deposit Ratings. According to the developed model, the main factors involve bank assets structure, level of credit risk, profitability, bank capitalization, stability of resource base as well as macroeconomic factors, including investment and unemployment.