Analysis of Bank Failure Using Published Financial Statements : The Case of Indonesia ( Part 2 )

Published financial statement is the only publicly available report on financial condition of a bank operating in Indonesia. It contains limited information, but we want to exploit it to discriminate between normal, problem, and liquidated banks and to find factors underlying these conditions. We observed 213 banks and analysed 42 initial variables representing earning and profitability, productivity and efficiency, quality of assets, capital adequacy, growth and aggressiveness, credibility, size, income and source of fund diversification, liquidity, and dependence on affiliates. In the classification we used ranks of each variable rather than its numerical value as such. After learning the characteristic of variables theoretically, applying certain statistical tests, making necessary transformations, creating new variables and deleting unnecessary variables, we found that the ranks of 12 variables out of initial 42 could discriminate three groups of banks significantly two years before failure while the ranks of just two variables could discriminate significantly one year before failure. We considered three major groups of variables in our first paper. In this second paper we start with capital adequacy variables and consider altogether six groups of variables. Then we show that it is sufficient to select seven basic aspects of financial structure and performance of a bank, which can be efficiently and consistently measured by the variables of simple and Currently at Victoria University of Wellington.