An Early Warning System for Bankruptcy Prediction: lessons from the Venezuelan Bank Crisis

During the years 1993-94 Venezuela experienced a severe banking crisis which ended up with a total of 18 commercial banks intervened by the government. Here we develop an early warning model for detecting credit related bankruptcy through discriminant functions developed on financial and macroeconomic data predating the 1993-94 crisis. A robustness test with data from 1996-2004 performed on these functions, shows high precision in Type 1 & 2 errors. The model calibrated on pre-crisis data is even able to detect abnormal financial tension in the late Banco Capital by June 2000, many months before it was intervened and liquidated.