A Warning Model for Bank Default in CEMAC Countries

Duclaux, SOUPMO BADJIO

Ph.D. Student
HEC Management School-University of LIEGE Department of Accounting, Finance and Law Rue Louvrex, 14, B-4000 LIEGE BELGIUM Phone number: +32494105596 Email: dbadjio@student.ulg.ac.be

Abstract
This study aims to propose a model to predict banking difficulties in the CEMAC region. Inspired by the methodology used in studies published by Martin (1977), Godlewski (2004), and others, we use a logit model and succeed to build a model with central African specificities. Used variables are a mixture of financial ratios, institutional and cultural factors related to the context of CEMAC countries. Results obtained from the construction of a model meant to forecast bank distress herein are satisfactory. Three ratio variables and three qualitative variables are statistically significant, notably: creascreb (crances en souffrance/gross credits), creddep (total credits/total deposits) and creadcreb (doubtful debts/gross credit). While the first two have a positive relation with default probability within one year, the third has negative bearing. Some of the qualitative variables related to institutional context however significantly correlated to the default variable could not be retained for the model because of their statistical irrelevance.

JEL Classification: G21; C35 Keywords: Warning model; Banking regulation and supervision; Central Africa; Logit model

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1.

Introduction
In a bid to stabilize the banking system, the second pillar of Basel II Agreement on capital

adequacy underlines the importance of prudential monitoring. The device therefore defines new obligations for risk management and control. In recent years, but for on-site and off-site monitoring, models for bank distress have been developed by bank supervisory authorities. The advent of the global banking down turn and financial meltdown is a reminder of the close link between regulation, prudential supervision and financial distress forecasting. The scientific community has also proposed some models; in addition to those of aforementioned banking authorities. The banking regulation became the focus among researchers, professionals and managers of the sector; this was followed by several publications which all agree on the importance of banks supervision (Santos, 2000; Barth and al., 2004; Patat, 2000; Quintyn and Taylor 2000; Benston and al., 1996; Berger and al., 1995; Besanko and Kanatas, 1996; Blum, 1999; Freixtas and al., 2002; ). Yet there exist no unanimity on the level of regulation. Bart and Al (1999) ask therefore the question to know whether countries with more restrictive regulations have a low probability to suffer from the banking crisis. The negative reply to these questions is a contradiction to the argument that stricter restriction to bank authorized activities reduces excessive chances of facilitating control by monitoring authorities. In Central Africa, bank supervision and regulation has grown up to be the solution to the banking crisis that prevailed in the CEMAC zone in the late 1980s. Before the 1990s, banks of the CEMAC zone encountered severe difficulties among which causes was the absence of regulation and supervision. This is how in 1990, the Central African Banks Commission (COBAC) was created with as prime assignment the surveillance and control of credit institutions. Since 17 January 1992, when the Central African States decided to harmonize their banking regulations, new caution rules where published so as to harmonize COBACs monitoring tools and to put them as much as possible in compliance with the basic principles as prescribed by the BASEL Committee for the efficiency of banking supervision. The purpose of this paper is to study the supervision system of banks applicable in the CEMAC zone; it also aims to propose a pattern of forecasting the difficulties faced by banks in the CEMAC zone. For the development of this pattern, we have panel data, with 30 banks from the CEMAC zone countries in instant cuts and for a period of five years. All the restrained variables are a mixture of variables listed within purely practical literature on the forecasting of banking system failure and ratios we consider relevant for the management of Central African banks. Taking into account the

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availability of data, we were obliged to do without some of the variables, especially those related to the performance of banks. The dependent variable Y is binary and gets value if the ratio funds/ assets is superior to 8% and 0 otherwise. Considering the quality of data, from the dependent variable and as we get inspired from earlier works, we will opt for a specific approach to develop our own pattern. Bank difficulties alert models can be grouped into two categories: The parametric approach (logit or probit model) and the non parametric approach (Trait recognition Analysis) developed by two writers, Beaver (1966) and Altman (1968), referred to as pathfinders on the forecasting of companies bankruptcy. Within the frame of this work, we shall follow the example of Martin (1977), who was the first to apply the Logit model to detect bank difficulties and Godlewski (2004), who is interested in the probability of banking system failure in developing countries. The uniqueness of this contribution comes from the fact that it fills a gap. There exists so far no bank difficulties and failure forecasting model in literature for CEMAC countries. This is obviously linked to bank data access difficulties. After overcoming this obstacle, we kept as our pattern variables that are both adequate with available data and banks management within the sub-region. This article is organized as follows: In Section 2, we are presenting a literature review on the methods and tools for preventing bank default. The data and methodology are tackled in Section 3. The results are presented in Section 4 and Section 5 concludes this paper.

2.

Methods and tools for the prevention of bank default

In this Section, we shall first of all address the role regulations, banking supervision and capital

ratios play in the prevention of bank distress before touching early warning models.

2.1. The role of regulation and supervision in the prevention of bank default
Many Central African banks witnessed serious financial difficulties in the late 1990s to which the absence of regulation was a major cause. Like for Central Africa, the absence of regulation is generally seen as the origin of the banking crisis: a case in point is the banking crisis that ate deep into Japan towards the dawn of the millennium. According to Horiuchi (2000), Le dysfonctionnement de la gouvernance bancaire est lorigine de la profonde crise qui frappe les banques japonaises, mettant le systme financier de ce pays dans une situation critique depuis fin

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1997 . Japanese authorities subsequently acknowledged the importance of prudential rules for their banking system. These examples bring to mind the following concerns: - Do banks really need regulations? - Is there a link between banking supervision and their performance? - What is the scope of power that banking supervisory authority should have? To the issue of knowing if banks have need for regulation, Santos (2000), provides two answers: the risk of a systematic crisis and the incapacity of depositors to oversee banks. Isolating banks in default, insurance of deposits, moral hazard, and the price of insuring deposits are justifications for the argument on systematic risk. Patat (2000) agrees with Santos and goes a bit further in underlining the role central banks play in ensuring financial stability. According this author, one of the twenty-five fundamental principles provides for the independence of the establishment exercising banking control, a legitimate responsibility of central banks. He further asserts the incontestability of central bank independence, be it vis--vis public or private interests, emphasizing that their legitimacy in banking supervision also emanates from their updated knowledge and expertise in the banking system. More so, central banks in most countries have unrivalled credentials. Other authors have worked on this concept of independence in banking supervision. Barth and collab. (1990) studied the relationship between the regulation and monitoring of banks, and their performance. They put the following questions thereafter: a) Do countries with relatively weak systems of government and bureaucracy impose strict and tough rules on banking activities? Answer: Yes. b) Do countries with stricter regulatory systems have poorer performing banking systems? Answer; No, or Not very certain. c) Do countries with stricter regulatory systems have a low probability of witnessing a banking crisis? Answer: No. The answer to the 3rd question contradicts those who believe that stricter restrictions on banks allowed activities reduce excessive hazards taking habits, partly by facilitating the control by the authorities of surveillance and market stakeholders. (Barth & Al., 1999) This answer doesnt question the legitimacy of regulating banking supervision; but rest the issue of the scope of power granted the supervisory authority. After researching on monitoring and bank performance, Barth and collab. (2004) address the concern of the scope of power given the supervisory authority. The authors underline the existence

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of theoretical models that suggest advantages of granting them much power. They are many, but we will mention just a few: - Firstly banks are costly and difficult to supervise; leading to bank monitoring which increases bank performance and stability. This can also improve market risk; - Secondly, due to information asymmetries, banks are objects of contamination effects et decrease social well being in event of costly bankruptcy. Monitoring in this perspective provides a socially efficient role; - Thirdly, many countries opt for bank deposit protection systems, this leads to excessive risk taking on their part. Monitoring under such circumstances can deter banks from engaging in too many risky ventures and of course lead them to development and stability. Quintyn and Taylor (2002), while making a link with banking stability, focus on the independence of the regulation and supervision of banks. They highlight four indispensable dimensions for the optimization of an independent prudential system, notably: regulation, supervision, institution and finance. They come up with the following conclusion Autonomy in terms of fixing the prudential rules and supervision is a crucial condition from all the points of view and compared with other systems of supervision, independent supervision is strongly desirable in the light of the specific function of public interest and the achievement of financial stability. However, the realization and the safeguarding of the integrity of the supervision require a good definition and an important level of transparency. If it is easy for professionals and academicians to endorse, on the one hand, the legitimacy of regulation and banking supervision and, on the other hand, the independence of the supervisory structure in the establishment of prudential rules, they are well divided over the appropriate amount of regulation. Summits, works and publications that surged in the aftermath of the global financial meltdown have not addressed the concern of putting to place strict banking regulation and supervision. We shall endeavour to classify publications on the financial crisis in three categories, namely: - Reports by financial and banking supervisors and actors (example: The Bank of International Regulation, IMF, The World Bank); - Reports by special commissions with states mandate (example: report on banking and financial crisis1, Ricol report2, G30 report, Lamfalussy report3 and

Report on behalf of the Special Commission in charge of examining the banking and financial crisis in Belgium.

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- Publications by researchers and consultants (Chailloux and collab., 2008; Gwinner and Sanders, 2008. A.T Kearney, 2008) tackle the problem from a different angle. Only the third category highlights banking regulation and supervision, which further shows how its flexibility in the USA favored the deregulation of the banking and financial system. While admitting loopholes in the regulatory provision, supervisors are against a stricter regulation. Reports published in Europe favor more co-operation and dialogue among authorities concerned with financial stability. It is worth noting that, beyond these differences in views, other divergences exist between countries; while some advocate for tighter regulation and supervision, others preach the contrary. Fortunately, this is not the issue in Central Africa where provisions relating to supervision are still under work to comply with the fundamental principles of the Basel Committee. While the level of regulation is still a matter of antagonism in literature, the capital requirement ratio is important for the stability of all banking systems; we will address this parameter in the following sub-section.

2.2. The Important Role of Bank Equity (Capital)

Literature highlights the role of capital in financial institutions in general and banks in particular, presenting them as important components in risk valuation. The concept of capital, otherwise known as Equity, could have several meanings: social capital, economic capital, regulatory capital, etc. While regulatory capital is the minimum equity established by the supervisory body, economic capital is derived from the banks internal risk management models. Social capital on its part is simply that liability element, common to banking institutions and other corporations. It is therefore admissible that a bank should have enough capital to hedge the risks it runs. In a bid to understand their importance in financial institutions and the role they play on bankruptcy risk, we will analyze the efficiency of capital in the presence and absence of regulation. Miller and Modigliani (1958) are an inspiration to many researchers on the financial structure of corporations in general and banks in particular. Many hold that equity has, as principal role, the guarantee of bank solvency. In other words, equity enables banks to withstand the consequences of financial default. We could deduce that the absence of equity will lead most banks to bankruptcy. Let
2 3

See bibliography INTERIM REPORT, High Level Committee on New Financial Achitecture (report published under the leadership of A.Lamfalussy).

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us be mindful here that, in the basic model developed by Miller and Modigliani (1958), the value of a firm is not determined by the distribution of dividends and payment of interests on debts to shareholders and creditors respectively; it is endogenous to the size of global cash flows. The authors further showed that this concept can be translated to banks, if deposits are assimilated to liability. The drawback of this theory lies on the fact that, while it assumes markets are perfect, the banking market is one with information asymmetry. Several authors have integrated this new dimension in their search for the optimal structure of capital in banks (Diamond and Rajan, 2000; Genotte and Pyle, 1991; Shrieves and Dahl, 1992; ). In the model by Diamond and Rajan (2000), they show that the optimal level of bank equity is that which allows optimal arbitrage between the creation of liquidity by the bank, bankruptcy cost and its ability to redeem depositors. Therefore, the more equity a bank has, the more comfortable it is. In the absence of banking regulation, this line of research shows that it is important for a bank to have sufficient equity in a bid to hedge the risks it runs. The introduction of prudential regulation confirms the cardinal role of equity. It extends the subject matter to the relationship between increasing capital and risk taking by banks. Berger( 1995); in a review of the evolution of capital ratio in the USA, historically, the emphasis is that the capital requirement ratio imposed on American banks was that between Equity and Total Assets on a balance sheet. This ratio later evolved to the ratio of balanced risks (as per respective asset risk). With the adoption of the 1988 Basel Agreement and definition of Cooke ratio, banking capital becomes a concern to many countries; at this stage, the definition of capital requirement has the same tendency as those mentioned before herein. The prudential capital requirement ratio as defined by the Basel Committee must reflect risks engendered by the bank. It is in a bid to draw regulatory capital and economic capital together that the Basel Committee published a new provision, with a novel definition of capital requirement. Capital requirement here consists of pillars 1, 2, and 3. The new element is pillar 3, while pillar 1 consisting principally of bank equity and reserves, remains unchanged. From the point of view of Colmant and collab. (2004), Le tier1 constitue, aux yeux du Comit de Ble, llment le plus important des fonds propres rglementaires dans la mesure o il est le plus stable et le plus mme de rsorber les pertes subies par la banque . While literature is in agreement as to the role of equity in banking institutions, the question which should be asked is that of knowing if a high capital requirement ratio can limit excessive taking of risk and/or avoid banking distress. In making a parallel assessment with research on the relationship between the level of regulation and bank risk taking, theoretical literature fails to address the concern of whether high capital requirement ratios reduce or increase bank risk taking. However, empirical studies show a

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negative link. In Cole and Gunther (1995), an increase in capital requirement ratio reduces bank risk and the probability of default. This thesis is supported by Avery and Berger (1991). These authors sought to know on the one hand, the minimum threshold for capital requirement and, on the other, which one between Equity/Total Assets and balanced risk ratios, can adequately distinguish between a solvent bank and one in financial distress. Estrella and collab.(2000), throw some light in the second question by showing that the use of capital requirement ratio to distinguish between solvent banks and those in financial distress is as good a method as the more sophisticated balanced risk ratio on a time horizon of two years. Cooke and Mc Donough ratios define a threshold of 8% to distinguish between solvent banks and those in distress. The second ratio which was published for the first time with Basel II Agreements is defined as the quotient of regulatory capital on the balanced-risk of total assets. In the next publication (Basel III on a new prudential device on capital norms and measures), the Committee is looking forward to propose another definition to the solvency ratio: which will have, as denominator, Total Asset instead of risk-balanced assets. This new definition features on the consultative document for prudential regulation that was sent to the banking industry by the Basel Committee on banking control. It will inspire us in the following sections of this paper for the construction of a model for bank default in Central Africa; we consider a bank to be in financial distress when the Equity/Total Asset ratio is less than 8%. Before building this model, let us examine the different types of warning models for financial distress or bankruptcy.

2.3. Typologies of financial distress Warning Models

Early Warning Systems (EWS) can be classified into two categories: non parametric approach (Trait Recognition Analysis) and parametric approach (Models of Logit and Probit type).

2.3.1

Non Parametric approaches of EWS Models Non parametric models generally called Trait Recognition Analysis (TRA) or Trait Recognition

Model (TRM) have their origin in the works of Beaver (1996) and Altman (1968) who are considered as pioneers in the forecasting of corporation bankruptcy. These models were then used as EWS for bank distress and default. The specificity of TRA is that it does not lie on any statistical hypothesis on the variable to be predicted. TRA Models are associated with the networks of neurons; they seek to exploit the contained information in the complex interactions between the independent variables used.

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(Jagtiani and collab., 2000). The methodological approach consists of identifying the set of variables which reveal abnormal behavior in the period preceding default. The selection of independent variables and definition of thresholds is the discretion of the researcher, which can be a source of bias in the estimation of the results. In a study meant to predict bankruptcy in big commercial banks in the USA, Kolari and collab. (2000) use two different methodological approaches: a parametric model and a non parametric model (TRA), and they spell out the advantages and disadvantages of both approaches. In comparing results from the different models, they conclude that the TRA model has performances similar to those of logical regressions when information is obtained two years prior to the crisis. These authors also indentify some downs in the TRA approach, namely: - It is not possible to determine which variables are pertinent for default forecasting as results only indicate the efficiency of these variables while discriminating between two groups (bankrupt banks and others); - Estimated results do not provide information on first and second order risks; - TRA models are not appropriate for the examination of interaction between variables; - Independent variables used in the model are relative only to financial information from certain banks. The abovementioned stumbling-blocks invite some interest in EWS parametric models which have largely been used in the literature on models of alerting or alarming banks in financial distress or difficulty.

2.3.2. Parametric Approach of EWS Models Many risk valuation systems are used by institutional supervisors (whose role is the monitoring of financial institutions) for forecasting bank financial default. Sahaiwala and Van de Bergh (2000) propose a classification of the systems used by supervisory authorities of the G10 countries: 1- Bank Rating Systems(Supervisory Bank Rating) 2- Financial Ratio Analysis (Financial Ratio and Peer Group Analysis Systems) 3- Complete or Exhaustive Valuation Systems of bank risks (Comprehensive Bank Risk Assessments) 4- Statistical Models

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We will endeavour to provide a quick description of systems and methodologies resulting therefrom. The rating system is made up of essential tools for the supervision of banking institutions; these are an effective measure of their financial situation. Like other models, this system subscribes to CAMEL4 type. As a matter of fact, since the 1980s, American supervisors (FED, FDIC and OCC) have used the CAMEL system as an indicator of financial health. The methodology consists of valuing each bank based on six criteria and then attributing it a rating. These six criteria are: Solvency (capital adequacy), Asset quality, Management quality, Earning ability, Liquidity position and Sensitivity to Market Risk5. The regulator rates each of these criteria on a scale of 1 to 5 (1 being the best rating). These ratings are obtained from qualitative and quantitative evaluation of information obtained from the field in the financial institution; afterward, balancing of risk weights (to obtain a rating that synthesizes information provided by CAMEL components) is entirely at the discretion of the regulator. Such ratings provide the supervisor with a basis for figuring out preventive and corrective measures. This rating system however has some downs: it reflects the financial situation of the bank at the time of valuation and cannot be used for a preventive action. More so, such ratings neither provide information about the potential source of fragility, nor on particular decisions taken by the bank in a bid to gauge global fragility. Analysis of Financial Ratios on its part uses financial ratios to propound On-Site6 analysis of banking institutions, what goes beyond the estimation of performance. This system provides a threshold for choosing ratios and signals cases were ratios exceed such bottom-lines. Banks are grouped by size or activities and ratio analysis carried-out between banks of the same group or between those with similar past situations. The following are the advantages of this system of analysis: - It enables a systematic valuation of banking activity while detecting tendencies in the banking industry; - Weak zones in the bank can also be detected; - Banks with potential difficulties can be isolated;

The principal drawback of this analysis is its inability to detect risks taking by financial institutions (it cannot also isolate a systematic problem). Because of this inconvenience, the use of this system in
4

Capital Adequacy Asset Quality, Management, Earnings, Liquidity. This last criterion appeared later on, notably in 1997. 6 On Site examination consists of a visit by the regulator at the bank in a bid to evaluate its financial solidity, see if it is working in accordance with the regulations and assess the quality of its management and internal control system.
5

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the detection of bank distress is limited. However, it could be complementarily used with other EWS systems. In bank risk valuation, exhaustive or complete risk evaluation systems go much further. This system provides a complete evaluation of qualitative and quantitative risk factors of a banking institution; it defines appropriate factors of risk profiles to be analyzed. This methodology also enables: the aggregation of risk valuations at various levels of the corporation or bank group; identification of potential sources of financial vulnerability and specificity of each institution. No doubt the principal advantage of this system is that it provides a global evaluation of the banking system; it however has the drawback of requiring a lot of resources for a complete evaluation of risks in banking institutions over a relatively short period of time. To gauge this running-cost problem, world banking supervisors have developed statistical models for forecasting the financial situation of banks. Statistical models, beyond their cost effective advantage, also determine causal relations between financial or economic variables, and financial distress of financial intermediaries. The methodology consists in forecasting the rating that a bank would have obtained in case it was evaluated on the field. From the perspectives of Chauveau and Capelle-Blancard(2002), statistical models could be applied to all institutions of the sector, provide continuous control and consequential reaction if the situation deteriorates. Since Sinkey (1975), statistical models have witnessed significant development; the author uses Multivariate Discriminating Analysis (MDA) on a sample of 220 small commercial banks in the USA from 1969-1972; during which period 110 bankruptcy cases were registered. 6 out of 10 variables chosen from 100 ratios are significant. The asset quality of the bank appeared to be the most discriminating variable. Other variables are: credit characteristics, capital requirement, sources and use of income, efficiency and return. MDA only enables to make a distinction between healthy banks and those that are in distress; it does not establish the causes of distress and difficulty. Thereafter, statistical models where object of much academic research; this led to the development of bankruptcy forecasting models. Many authors are tuned to the use of those requiring limited endogenous variables (Logit or Probit for instance) to MDA. Martin (1977) was the first to apply Logit models in a bid to detect early banking distress. From a sample of 5,700 banks between 1970 and 1976, during which period 5,642 remained healthy while 58 defaulted; he tested 25 variables, among which 4 were significant, notably proxies for the capital on risky assets ratio and the composition of credit portfolio in relation to balance sheet total. Other authors, such as Barr and Siems (1994), apply a Probit model which integrates an efficiency rating (from the non parametric methodology: Data Envelopment Analysis (DEA) as proxy for management quality. In the storm of

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publications on banking distress and bankruptcy in the USA and Europe (Cole and Gunther, 1998; Estrella, Park and Prestiani, 2000; Kolari and collab. (2000), some authors paid attention to developing countries in general and African countries in particular. Gonzalez-Hermisillo and collab. (1997), while studying banking systems in Mexico with a duration model, shows that banking fragility is due to specific bank factors, macro economic conditions and effects of potential contamination. In sub-Saharan Africa, very few studies have been carried-out. Powo Fosso (2000) uses the conditional Logit model on panel data to analyze determinants of bank failure in WAEMU7 countries between 1980 and 1985. He shows that: les variables qui affectent positivement la probabilit de faire faillite des banques sont i) le niveau dendettement auprs de la banque centrale; ii) un faible niveau de comptes disponibles et vue; iii) les portefeuilles deffets commerciaux par rapport au total des crdits; iv) le faible montant des dpts terme de plus de 2 ans 10 ans par rapport aux actifs totaux; et v) le ratio actifs liquides sur actifs totaux. En revanche, les variables qui contribuent positivement la vraisemblance de survie des banques sont les suivantes : i) le ratio capital sur actifs totaux; ii) les bnfices nets par rapport aux actifs totaux; iii) le ratio crdit total sur actifs totaux; iv) les dpts terme 2 ans par rapport aux actifs totaux; et v) le niveau des engagements sous forme de cautions et avals par rapport aux actifs totaux. In addition to these findings, other works were later on carried out in West Africa, notably those of Capiro and Klingebiel (1996) and Demirguc-Kunt (1998) who retained only macro economic variables and ignored financial variables specific to firms. It is worth nothing that other models saw the light of day after the aforementioned four categories of EWS models, notably those integrating institutional factors. These were founded on the grounds of integrating institutional factors as determining variables in the explanation of bank distress. From past literature, it could be deduced that taking institutional factors into consideration improves the models predictive power. Let us mention, among others, the works of Godlewski (2004), and Bath J.R., Caprio Jr G. and Levine R. (2000, 2001 and 2004). Godlewski (2004) proposes a two step modeling approach and demonstrates that taking institutional and regulatory factors into consideration improves the predictive power of bank default models in emerging countries. Barth J.R. and collab. (2004) empirically verify that bank development, while positively correlated to policies that favor private control, are however negatively linked to a dominant public supervisory agency. In the same vein, Abdennour and Houhou (2008) developed a warning model of bank distress for emerging countries. They apply a Logit model on a sample of 174 commercial banks in 16 countries covering South-East Asia, Latin America, Central and Eastern Europe and The Middle East. Variables used are a combination of proxies for the CAMEL type and institutional factors. These
7

West African Economic and Monetary Union.

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authors arrive at the following conclusion un systme dalerte prcoce de difficults bancaires incluant des variables financires type CAMEL et des variables juridiques rglementaires et institutionnelles est dun grand intrt dans les cas des banques des pays mergents. This last set of bank distress prediction models combine financial and institutional variables and are part of research on institutional theories. Results of the models show that bank organizations as well as other organizations do not evolve in isolation; they are influenced by their external context. This study empirically determines principal factors that could explain bank distress in countries of the CEMAC region. To this day in literature, there is no model for forecasting bank default in the area; the object of this paper is to propose one. As a reminder, we underline that this research is within the new framework of institutional theories. We will therefore have recourse to the last category of last set of aforementioned models which combine both institutional and financial variables. Analysis of the banking landscape of CEMAC countries worked out in the preceding studies allowed to discern on the one hand, institutional variables relative to regulation ratios, to access to economic and accounting information, the behaviors of entrepreneurs and countries in which the bank is operating and, on the other hand, cultural factors linked to solidarity and ethnicity. These variables, on a time horizon of one year, will be combined with financial variables for the construction of a warning model of bank distress for the CEMAC region.

3.

Econometric model
Our models adopt a novel quality as aforementioned, in the view that it integrates institutional

factors as determining variables in the explanation of bank distress in the CEMAC region. Such factors, defined in previous studies, will help us in the definition of data and variables which constitute part of the methodology in model construction.

3.1. Data Collection

In the present study, we will endeavour to examine data on bank distress in CEMAC countries over a time horizon of one year, which is a widely used time-spell in literature for the same end (Sinkey, 1975; Altman and collab.,1977; Sahajwala and Bergh, 2000; Godlewski, 2004;). Statistical data for quantitative analyses emanate from the CERBER system. While admitting that data from this new system are yet unpublished, we had the privilege of collecting them during a one month internship at COBAC in July 2009. Data were collected there between 1 January 2000 and 31

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December 2008, and concern exclusively banks of the CEMAC zone. We will however limit ourselves to data between 2004 and 2008, because they provide the possibility of constructing an equilibrium panel. The data account therefore reveals 34 units in cross section and 5 years in time series: a total of 170 observations. There are many advantages in using panel data; we shall pinpoint a few herein: i) They provide more informative data, little co-linearity between variables, more degree of liberty and efficiency; had we stopped focusing exclusively on panel data, we would have had only 32 observations; ii) Some effects that can hardly be scrutinized with time series or cross sectional data (like bank difficulties) can be discerned; iii) The possibility of a dynamic study of change is last herein but not the least.

Definition of banks in financial distress and those deemed as healthy. Let us recall that, in June 2004, upon the publication of a text on international convergence on norms of and measure for equity, the Basel Committee reiterated the essential role, equity plays in detecting bank distress. The Committee distinguishes pillar 1, pillar 2 and pillar 3 in its definition of capital requirement and reaffirms the constituents of pillar 1 which are mainly, bank equity plus reserves. COBAC like the Basel Committee pays particular attention to capital requirements and defines them as the sum of Basic Equity and Complementary Equity. Our reliance on past studies in bank distress gives us some reason to retain capital requirement ratio as a bankdifficulty indicator. In our imperative of constructing a model, we shall acknowledge that a bank is in financial trouble when it is underfinanced: meaning, when its Equity on Total assets ratio is less than 8%. Our choice of this definition of solvency ratio instead of the ratio of Equity on Risk-balanced total assets is not only a matter of data unavailability; it is also a proactive measure in anticipation of that which will be published in the near future by the Basel Committee(Basel III Agreement).

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Table 1: Number of Banks used for the study Number of Operating Banks as of 31/12/2008 12 4 7 6 4 7 40 Number of Banks retained for the study 11 3 7 4 3 6 34 Banks in Financial Difficulty 20 6 12 6 5 11 60

COUNTRIES

Number of Observations 55 15 35 20 15 30 170

Healthy Banks 35 9 23 14 10 19 110

Cameroon Central african R. Chad Congo Equatorial Guinea Gabon TOTAL

As we have had the opportunity to specify earlier, the table shows that the 34 banks retained in the study were operating between 1 January 2004 and 31 December 2008. While the number of underfinanced banks at the turn of 2004 was 12, it witnessed a drop to 9 in 2005, before moving up to 14 in 2006, then falling back to 12 in the following year and finally edging to 13 at the close of 2008.

3.2. Definition of Variables

Dependent variable On account of past admissions, we define the endogenous variable as follows: = , = Independent variable Institutional variables resulting from there will be combined with financial ratios (from CEMAC banks) in the conception of explaining variables used hereunder for our model. We have also taken detailed account of principal factors used in literature as exogenous to banks distress8. Because of data unavailability, we might have omitted some variables of remarkable sensitivity similar to those relating to the results of financial institutions. Ratio-type variables retained herein and based
8

< 8% ,

We are inspired by similar works as those of Altman and collab.(1977, 2001), Bardos (2005), Barth and collab.(2001a, 2001b and 2004), Godlewski(2004a, 2004b and 2004c), Grice and Ingram(2001), Jagtiani and collab.(2001). Just to name a few.

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on the CAMEL typology are specifically flavored by the M type as we preferred managementquality oriented variables, in line with COBACs definitions.

Table 2 List of explaining variables

N 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Variables Date_valo Id_banq id_pays fdprbilan fdprcred creadbilan crednbilan creadcreb creascreb provecread provebilan provecreb creddep depbilan caisbilan ratregl Description Valorisation data Bank identification Country identification Equity / Total Balance Sheet Equity/ Total Credits Doubtful Debts / Total Assets Net Credit / Total Assets Doubtful Debts / Gross Credit Crances en souffrance / Gross Credit Current provisions / Doubtful Debts Current provisions / Total Balance Sheet Current provisions / Gross Credit Total Credit / Total Deposits Total Deposits / Total Assets Cash in Hand / Total Assets =1, if the bank thinks that the requirement ratios from COBAC are unfavorable to banking activities; 0, if not. =1, if the bank believes that difficulties in having access to information is unfavorable to banking activity; =0, if not. =1, if the bank acknowledges that the behavior of debtors is unfavorable to banking activities ; =0, if not Measure the importance of the solidarity dimension in the functioning and management of the bank; scale from 1 to 5; 1 : least important, 5 : most important Measure the importance of the ethnicity dimension in the functioning and management of the bank; scale from 1 to 5; 1 : least important, 5 : most important Type Date qualitative qualitative Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Nominal CAMEL Equivalent C C A A A A M M M L L L -

17

accesinfo

Nominal

18

compemp

Nominal

19

solidarit

Ordinal

20

ethnicit

Ordinal

NB : In a bid to capture a country effect in the model, variable id pays in the database is replaced with 6 dichotomous variables ( car , caf , cog , gab , gnq , tcd )

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The first two variables, notably fdprbilan and fdprcred , represent how capital is adequate to credit portfolio. The second ratio is foam for the absorption of potential losses (Godlewski, 2004a). Since the principal activity of a bank is the granting of credit, it appears logical to include this second ratio in our model. On a time horizon of one year, these two ratios have a negative impact on default probability. The second group of variables measure asset-quality (notably its credits) in bank ( creadbilan , crednbilan , creadcreb and creascreb ). An increase in Gross or Net Credit on Total assets could signal that the bank is in financial trouble (Jagtiani and collab., 2003). Management quality in banks is expressed by the third group (( provecread , provebilan , provecreb ). As opposed to those drawn from literature, these ratios are based on elements, COBAC deems important for the management of banks. We acknowledge the pertinent quality of such variables for a model. The last set of ratios ( creddep , depbilan , caisbilan ), expresses lexposition de la banque au risque de liquidit, en se focalisant sur les ressources disponibles et les degrs de liquidit des actifs de la banque. (Godlewski, 2004b). On a one year horizon, these ratios have a positive impact on banks default probability. The list of ratios is completed with five institutional-factor-oriented variables in Central Africa, notably institutional-related variables on the one hand: the perception of actors in requirement ratios, access to accounting and economic information, behavior of debtors and country in which the bank is located and, on the other hand, cultural variables like solidarity and ethnicity. These variables were identified in previous studies, as characteristics of the general institutional environment as well as the cultural environment of the CEMAC sub-region.

3.3. Methodological approach

Our methodological approach can be summarized in three steps: 1. Descriptive Statistics of ratio variables; 2. Principal Component Analysis; 3. Logit model. To begin with the first step, determining the correlation coefficients between different explaining variables and explained variable, enables the extraction of variables that will be pertinent for our model. This step will be followed with a Principal Component Analysis (PCA) of financial

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variables. The object of this second step is to reduce the dimension of ratios which stood at 12 at the initial stage. Our choice of the Logit model in the last step is not only based on its widely acclaimed empirical predictive power in literature; it is also a function of the simplicity of its application. Beyond Martin (1977) who makes use of the Logit model in forecasting bank distress, other researchers such as Godlewski (2004), and Powo Fosso (2000), used it in their work on bank default in emerging and WAEMU countries respectively.

Let Yit = 1, if Capital/ Total Assets < 8% = 0, if not By supposing Yit* as the latent independent binary variable, instead of modeling Yit by itself, we model the probability P(Yit =1) for the variable to take the value of 1. To model this probability, we will be hypothetical in that; the decision rest on the value of the unobserved variable Yit* dubbed latent variable as per the following scheme: Yit = 1 if the bank is underfinanced (bank in difficulty), that is to say Yit* > 0 Yit = 0 if the bank is well financed (healthy or solid bank), that is to say Yit* <= 0 We assume that Yit* is lineary endogenous to a set of independent variables Xit .

Yit* = Xit + it = 1, 34 ; = 1, 5 Therefore,

= = *> 0) = F ( =

Where F is the function of logistic distribution.

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4.

Results and Interpretations

4.1. Descriptive statistics of ratio variables

We studied the descriptive statistics of ratio variables retained for the construction of our model. Table 4.3 hereunder shows the country-mean of exogenous variables. We separate healthy banks from those in distress and proceed to calculate the t-test of means resulting from there. Then we present the statistics of ratio variables for the set of banks considered for the CEMAC zone.

Table 3: Country means of ratio variables used in the study Difference in mean
0.277517 0.3777539 0.0689161 0.6586176 6.008802 5.066269 -4.099482 5.881193 16.87345 -63.02796 1.079746 0.0952909

Variables fdprbilan fdprcred creadbilan crednbilan creadcreb creascreb provecread provebilan provecreb creddep depbilan caisbilan

Global data
0.2339865 0.7481924 0.1008894 8.831878 12.79116 14.69586 88.31326 8.831878 36.47376 205.0574 1.692138 0.1089188

Not-in-distress
0.3319336 0.8815173 0.1252127 1.058301 14.91191 16.48396 86.86638 10.90759 42.42909 182.8122 2.073225 0.1425509

In distress
0.0544167 0.5037633 0.0562967 0.3996833 8.903107 11.41769 90.96587 5.0264 25.55564 245.8402 .9934783 0.04726

T-test on the difference

0.0022* 0.3825 0.0602* 0.0085* 0.0036* 0.0230* 0.5613 0.0752* 0.6730 0.0460* 0.0865* 0.0425*

The t-test mean difference shows that, in the absence of fdprcred , provecred and provecreb variables, at a 10% significance level, we can reject the null hypothesis which affirms that the difference in mean is zero. In other words, the mean of ratio variables of banks in distress is different from that of healthy banks.

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Table 4 Descriptive Statistics (Quantitative Variables) Variables fdprbilan overall between within overall between within overal between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within Mean
0.2339865

Std. Dev.
.5698882 .2690584 .5040769 2.686049 1.16613 2.426352 .22871 .1322702 .1876885 20.60274 12.02764 16.82953 12.96905 11.28507 6.622531 13.92912 12.0719 7.192965 43.80077 27.12429 34.64382 20.60274 12.02764 16.82953 248.0909 111.6765 222.1995 197.0744 131.0737 148.5418 3.924719 1.853541 3.471184 2931311 .1391556 .258882

Min
.0049 .0472 -.8824935 .0164 .09798 -4.277648 0 .00066 -.5779506 0053 .23694 -2.780472 0 .15126 -15.16396 0 18166 -15.913 0 0 -44.40238 0 0 -53.14348 0 0 -605.1314 14.4539 19.33006 -223.9811 0034 .21242 -6.279102 .0002 .01096 5157412

Max
5.2765 1.13976 4.370727 24.1902 5.09614 19.84225 2.4806 .67934 1.90215 10.5646 3.63862 9.077168 75.5687 45.96336 42.3965 76.3319 49.513 41.51476 376.6827 132.7156 332.2803 228.9634 62.02306 175.7722 3145.414 641.6598 2540.228 2120.898 655.0171 1670.938 35.1315 8.237 28.58664 2.3925 63656 1.864859

Observations
N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = N = n = T = 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5 170 34 5

fdprcred

0.7481924

creadbilan

0.1008894

crednbilan

8.831878

creadcreb

12.79116

creascreb

14.69586

provecred

88.31326

proevbilan

8.831878

provecreb

36.47376

creddep

205.0574

depbilan

1.692138

caisbiilan

0.1089188

Source: Calculations made on the basis of data obtained from the CERBER system N : Number of Obervations; Min and max.:minimum and maximum Std dev Mean Standard Deviation between: Inter-individual variability within Intra-individual variability overall Global variability

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These results call for two major comments. Values of mean standard deviations for between and within values of ratio variables indicate that for the same set of ratios, interindividual variations are greater than intra-individual variations. These results are important for the unfolding of our analysis because it provides grounds to hypothetically suppose that independent variables are exogenous. However, normality tests performed on ratio variables reveal that none is normally distributed. We shall proceed by studying correlations on the one hand between the default variable and potential explaining variables and, on the other hand, between quantitative variables.

4.2. Correlation Study and Selection of Significant Attributes

Correlation results are summarized in Tables 4.5 and 4.6. Table 5: Correlation between the default variable and explaining variables. Variables fdprbilan creadbilan crednbilan creadcreb creascreb provebilan creddep depbilan caisbilan caf cog solidarit Correlation coefficients -0.2334* -0.1444* -0.2013* -0.2221* -0.1743* -0.1368* 0.1533* -0.1319* -0.1558* -0.1864* 0.1506* -0.1324*

Variable on the above table are those found to have a significant coefficient of correlation at a 10% significance level. Thus, fdprbilan , creadbilan , crednbilan , creadcreb ,

creascreb , provebilan , creddep , depbilan and caf , cog solidarit respectively quantitative and qualitative variables significantly correlate with the default variable.

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There is therefore need to study the correlation between ratio variables in order to extract exogenous variables for our model. Table 6 : Correlations between explaining variables
fdprbi fdprcr cread lan ed bilan fdprbilan fdprcred 1.0 .0467 1.0 1.0 .2800* 1.0 1.0 .9733* 1.0 -.0472 -.0378 1.0 1.0 .1338* 1.0 -.1217 -.0128 1.0 .0234 -.0309 1.0 .7852* 1.0 credn bilan creadc creasc prove reb reb cread proev bilan prove creb credd depbil caisbil ep an an

creadbilan .1995* .0372 crednbilan .7443* -.0484 creadcreb creascreb -.0047 -.0179

.1330* .4051* .0549 .1240 .3863* .0409 -.0078 .0518

provecrea .0453 -.0608 d proevbilan .2127* .0395 provecreb creddep depbilan caisbilan .0018 -.0300

.9898* .2738* .397*

.3804* .0468

.7062* .9898* -.0433 .0429 -.1149 -.0048

.2646* .2596* .0289 .0249 -.0108 .0959 .0982 -.1301 .0828 .0483

.7698* -.0688 .6294* -.0303

.4003* .6330* .1150 .5316* .5441* .1199

.4180* -.0479 .5390* -.0316

Results of Table 4.5 enabled us to derive 9 variables that correlated significantly with the default variable. From the statistics above, fdprbilan , creadbilan , crednbilan , provebilan , depbilan and caisbilan are significantly correlated at a 10% significance level. Likely, creadcreb and provcreb are found to have a significant correlation. The variables creadbilan , creadcreb and creascreb are also seen to be correlated. In the same vein, at a 10% significance level, provecreb and creddep are correlated. After this correlation analysis, we unfold our agenda with Principal Component Analysis (PCA).

4.3. Principal component analysis of ratio variables

PCA is a technique for data reduction. In the context of ratio variables, firstly, we will be searching for principal components whose Eigen values exceed one or which represent at least 75% of total variance (starting information); then we will calculate the correlations between chosen components and ratio variables.

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Table 4.7: Presentation of Principal Component Analysis Components Comp1 Comp2 Comp3 Comp4 Comp5 Eigen Values
3.87847 2.43523 1.52602 1.18882 1.00713

Difference
1.44325 .909203 .337197 .181691 .159849

Proportion
0.3232 0.2029 0.1272 0.0991 0.0839

Cumulation
0.3232 0.5261 0.6533 0.7524 0.8363

As shown on the above table, we chose five components which represent 83.63% of information from the onset, after which we proceed with the calculation of correlation between these components and quantitative variables extracted for the work. Table 4.8: Correlations between principal components et ratio variables Variable fdprbilan fdprcred creadbilan crednbilan creadcreb creascreb provecread provebilan provecreb creddep depbilan caisbilan Comp 1
0.3446 0.0325 0.3949 0.3403 0.2323 0.2220 0.0307 0.3980 0.0698 -0.0379 0.4084* 0.4156*

Comp 2
-0.3125 0.2916 0.1790 -0.2725 0.4676* 0.4700* -0.0686 0.1724 0.3662 -0.0052 -0.2553 -0.1942

Comp 3
0.2723 0.6427* -0.2208 0.1550 -0.1661 -0.1749 -0.0060 -0.2145 0.5592* 0.1192 0.0895 0.0281

Comp 4
0.1222 -0.1018 -0.2252 0.1374 0.2699 0.2505 -0.4993* -0.2537 -0.1673 0.6457* 0.1036 -0.0116

Comp 5
0.1710 -0.1349 -0.3714 0.1715 0.3248 0.3467 0.6364* -0.3384 -0.0167 -0.1502 0.0831 -0.1011

From a 40% significance level, results of the above table show that variables: - depbilan and caisbilan are significantly correlated with the first component - creadcreb and creascreb are significantly correlated with the second component; - fdprcred and provecreb are significantly correlated with the third component; - provecread is significantly correlated with the fourth component and creddep is significantly correlated with the fourth and last components.

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Since some proxies such as fdprcred , provecreb and provecread were not significantly correlated to the default variable, we rule them out and retain: creadbilan , creadcreb , creascreb , provebilan , creddep , depbilan and caisbilan ratios. These would be added to qualitative variables ( caf , cog and solidarit ) and crowned as exogenous variables for our model.

4.4. The Logit Model

Due to the heterogeneous quality of data, hypothesis on the nature of specific effects varies depending on whether the model is of fixed or random effect. While in the first case, specific effects are correlated, they are orthogonal to explaining variables of the model in the second case. Before presenting the results of our Logit model, it is worthwhile to perform the Hausman specification test which will enable us to test which of the two hypotheses is appropriate to the observations.

4.4.1.

Hausman Specification Test

This test will guide us in our choice between fixed or random effect models. Table 4.9 Hausman Specification Test

---- Coefficients ---(b) eq1 creadbilan creadcreb creascreb provebilan creddep depbilan caisbilan
.0007535 -.0001084 .0110019 -.0000439 -.0015188 .0156938 .0005194 -.0001933 .0109486 -3.06e-06 -.0017472 .0177826 .0002342 .0000849 .0000533 -.0000408 .0002284 -.0020888

(B)

(b-B) Difference

Sqrt (diag(V_bV_B)) S.E.

.000299 .0002396 .0000457 8.21e-06 . .002886

b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(6) = 19.78 Prob>chi2 = 0.0030

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With a probability test of less than 10%, the Hausman test helps to conclude that fixed effects models are preferable to random effect models. We shall therefore opt for a Logit model with fixed effects.

4.4.2.

Presentation of results of the Logit Model

We will use a paneled fixed effect Logit model at the last stage of our model construction. Let us recall that in the preceding steps, we retained 10 explaining variables among which 7 are quantitative and 3 qualitative: creadbilan , creadcreb , creascreb , provebilan , creddep , depbilan , caisbilan and caf , cog , solidarit respectively. Table 10: Results of the Logit Panel Model with random effects.

Defaut creadbilan creadcreb creascreb provebilan creddep depbilan caisbilan

Coef.
17.9675 -.4897253 .3750378 -.1960296 .0067003 -.0314791 -2.930807

Std. Err.
21.46968 .2246454 .2014683 .2539443 .003769 .160179 2.436412

z
0.84 -2.18 1.86 -0.77 1.78 -0.20 -1.20

P>|z|
0.403 0.029 0.063 0.440 0.075 0.844 0.229

[95% Conf. Interval]

-24.11229 -.9300222 -.0198329 -.6937513 -.0006868 -.3454242 -7.706087 60.04729 -.0494283 .7699084 .3016922 .0140873 .282466 1.844472

Log likelihood = -36.393384

LR chi2(7) = 15.11

Prob > chi2 = 0.0346

Fixed effect conditional Logit Model Number of observations: 170 Number of groups: 34 Group observations, min: 5 Coef. Coefficient of explaining variables Std. Err.: Standard error [95% Conf. Interval]: 95% confidence interval LR chi2(7) =15.11 Prob > chi2 = 0.0346: the test is significant

Table 10 above depicts a synthesis of our results and provides a model for forecasting bank distress on a one year time horizon. The marginal impact in such a model depends on explaining variables and varies from one observation (bank) to another. The marginal effect of a ratio-explaining

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variable can be observed from the coefficient corresponding to the variable on the first column of the table. Among the 10 variables (7 quantitative and 3 qualitative), 3 (all quantitative) have coefficients that are significant at a 10% significance level. These are creadcreb (Doubtful Debts/Gross Credit), creascreb (Doubtful Debts/Gross Credit) and creddep (Total Credit/ Total Deposits). At a 10% significance level, the default probability on a time horizon of one year could be expressed in the following equation: Pr= exp -0,33973*creadcreb + 0,26093*creascreb + 0,00373* creddep 1+exp -0,33973*creadcreb + 0,26093*creascreb + 0,00373* creddep

4.4.3.

Discussions and Interpretations

We will mention all variables used initially, while laying emphasis on those that sounded significant for the model. Among significant variables, while two of them ( creascreb and creddep ) have a positive relationship with the default probability on a one year time horizon, the last ( creadcreb ) has a negative bearing. CREDDEP: this proxy is that ratio of total deposits on total deposits in the bank. Results from the variable show that it is significant and positively correlated to the default probability on a one year time horizon. It is worth noting that we expected such results. Since the banks principal role is the granting of credit, it is only logical that increasing the total credit/total deposits ratio will only increase the default risk of the bank on a one year time horizon. From a CAMEL perspective, it is a type L variable, meaning the ratio has a positive relationship with liquidity risk. CREASCREB: this second variable which is indicative of the proportion of crances en souffrance on gross credit in the bank is also positively correlated with default probability for an interval of one year. From a CAMEL viewpoint, it is a type A variable which measures the quality of credits of a financial institution. Results reveal that this ratio, when combined with ratio creddep , positively affects the probability of default on a one year tolerance margin. This result was also expected because the more the ratio increases, the more the credit portfolio of the bank will be of bad quality. CREADREB: this variable which denotes the portion of doubtful debts (credit) on Gross Credit of the bank is also significant, but negatively correlated with default probability. From a CAMEL spectrum, it portrays a type A variables, which is a measurement of the quality of credit in banking

- 26 -

institutions. The results of this variable are somehow ambiguous in the perspective that, since the variable is positively correlated to creascreb , we expected it to positively influence the probability on a one year interval. An increase by 10% of doubtful debts (credit) in the banks gross credit decreases the default probability by 0.48 points; for a one year period. An explanation to this could lie on the definition of doubtful debts (credit) in accounting systems used by CEMAC banking institutions. DEPBILAN: this ratio is the portion of deposits on the banks total assets. The higher the ratio (less assets respectively of deposits or vice-versa), the more the bank would face difficulties in meeting up with its obligations, especially if its clients were to come in unison to redeem their deposits. From the results above, this variable was not significant for our model. DEPBILAN is correlated to CAISBILAN , the ratio of cash in hand to total assets, which is also not significant. Both variables are of type L (with respect to CAMEL typology) and focus on available resources to measure the exposition of the bank to liquidity risk. Among the 12 explaining ratio-variables used at the beginning of this work, only 3 were statistically significant. We are poised to inquire after the others; to put this concern in clearer terms, how can we explain the fact that type C and type M variables were not appropriate for our model? As we have had the opportunity to elucidate above, type M ratios are based on the management quality of banks in the CEMAC zone. Our choice of them at the onset was grounded on the fact that they are indicators of good management as per COBACs norms. However, our dataset did not reveal such type M ratios. Among the three M variables chosen in the beginning, only provebilan proved to be significantly correlated with default probability at a 10% significance level. This bank management-oriented variable is significantly correlated to variable

creadcreb (doubtful debts/gross credit) at the 10% significance level. Concerning type C variables, the first (fdprbilan) which measures the ratio of equity to total balance sheet is the dependent variable of our model and thus is that which has enabled us this far to distinguish healthy banks from those in distress. The second (fdprcred ) which measures equity on total credit is not significantly correlated to default probability at a 10% significance level. In other words, it might be said that, in Central Africa, this second variable cannot be used to discern healthy banks from those in distress. Let us be mindful of the fact that, because of data unavailability, type E variables of the CAMEL prism, which measure performance on results of CEMAC banks, could not be used.

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Apart from the quantitative variables, three qualitative variables also proved to be significantly correlated with the default variable. However, they were not significant for the purpose of the model. At the initial phase, we introduced three dummy variables which were meant to capture the country-effect in the model. Two were significantly correlated with the default variable, notably caf and cog which captured the Central African Republic-effect and the Congo-effect respectively. However, these two variables appeared significantly irrelevant for the model. The other four countries - Cameroon, Chad, Equatorial Guinea and Gabon - had no effect on the model. In effect, the variables used to explain the respective effects of these countries on the model do not significantly correlate with the default variable at a 90% confidence level. It is hard to tell if these results were expected because while countries like Cameroon and Gabon enjoyed relatively stable political atmosphere between 2004 and 2008, the banking activity within this period was tattered with an economically unfavorable situation. Let us recall that the banking activity in Central Africa is marked with a low infrastructure and banking rates which are far lower than those of western countries. These results on bank default are revealing from the perspective of difference in banking landscapes between members of the CEMAC zone. Another unexpected result was the quasi-absence of institutional variables in the explanation of bank default; they were statistically insignificant. In other words, at a 90% confidence level, variables such as requirement ratios, access to economic and accounting information, the behavior of debtors and the ethnicity oriented cultural factor are not significantly correlated with the default variable. It could also be said of them that, within the realm of Central Africa, they cannot enable to make a clear distinction between healthy banks and those in distress. However, one culture- oriented variable (which is an element of the institutional environment), notably solidarit was significantly correlated with the default variable, but not worthy for the purpose of our model. Before rounding up this section, it is worth mentioning a principal limit in this work, which is linked to an error in the measurement of qualitative variables. Data collection tools used in Cameroon for qualitative data were not the same as those used in other CEMAC countries. Due to financial distress, we could not use for the other countries in the sub-region the same methods for data collection (like interviews and case studies) as in Cameroon. We therefore consoled ourselves with questionnaires, sent by means of mails, to respective banks located in the sub-region. This measurement-oriented limitation could explain the absence of significant institutional variables in the model. The mere fact that the solidarit dimension was significantly correlated to the default variable corroborates with literature on intercultural management in Africa which postulates that the management of organizations in the continent must take into account the specific socio-cultural realities of the respective countries.

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Let us now take a look at the performance and forecasting quality of our model.

4.4.4.

Performance and forecasting quality of our model

The performance of the model could be appraised from significance tests. Among a wide range of them in literature, we choose that of Hosmer Lemeshow, used by Godlewki (2004), as well as other authors who applied logistic regression in forecasting bank distress or default. Hosmer Lemeshows test is significant for our model as it indicates good global statistics and degree of adjustment. This is evident by a Chi2(7) of 15.11 with a testing probability of 0.0346. In order to appreciate the forecasting quality of the model, we compare our probability of predicting the occurrence of bank distress (that obtained from the model) with real probability. Since the later is not directly observable, we compare our probability with actual situations of distress. The table below puts this into perspective. Table 4.11 Model Forecasting table

---- True ---Classified + Total D

49 18 67

~D
11 92 103

Total
60 110 170

Classified + if predicted Pr (D) >= 0,5 True D defined as default = 1

The margin used is 0,59 ;which is a margin by default. The table illustrates that, for banks that were in financial distress, 49 out of 60 were correctly forecasted (probability higher than 0.5); and for those which were healthy (default=0), 92 out of 110 were well predicted. The forecasting rate of our model is therefore the sum of correctly forecasted cases on the total number of observations. 82.9% is derived from the arithmetic.

We could also have used a margin of 20% or the mean of the margin of the dependent variable.

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5.

Conclusion
The purpose of this paper was to propose a model for forecasting bank distress in the CEMAC

zone. We began by perusing typologies of early warning systems for banks in default ,distress or crisis; then we examined the role of regulation in the stability of the banking and financial system, before looking at the importance of solvency ratio as an indicator of bank distress. The results obtained from the construction of a model for forecasting bank distress herein are rather satisfactory. Three ratio variables and three qualitative variables are statistically significant, notably: creascreb (crances en souffrance/gross credits), creddep (total credits/total deposits) and creadcreb (doubtful debt/gross credit). While the first two have a positive relation with default probability on a time horizon of one year, the third one has a negative bearing. caf and co dummy variables; capturing the Central African Republic effect and the Congo effect respectively; however significantly correlated to the default variable, they could not be retained for the model because of their statistical irrelevance. The same fate applies to the solidarity variable (which measures the level of importance of the cultural solidarity dimension in banking organizations of CEMAC). The mere fact that the solidarit dimension was significantly correlated to the default variable corroborates with literature on intercultural management in Africa which holds that management of organizations in the continent must take into account the specific socio-cultural realities of respective countries. Due to the absence of data on results and performance of banks in the sub-region, we could not introduce type E variables under the CAMEL perspective: this of course should be a concern in future research work or study.

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