Banking Crises and the Potential Use of (Camels) Model Indicators for Forecasting Them (An Empirical Study)

Abstract

The research aims to highlight the importance of the (Camels) model in predicting banking crises, understanding the model's elements, and identifying banking crises, and their causes. The research assumed a positive impact on banks following early warning models to limit or reduce the risks of future banking crises that banks might face in the research sample. The research methodology relied on quarterly data extracted from the financial statements of the research sample banks for the period (2018-2022). These data were analyzed, and then the Vector Error Correction Model (VECM) was used to predict banking crises for the research sample banks. The results of the standard test showed the presence of cointegration among the research variables, confirming the existence of long-term equilibrium relationships. The error correction model results indicated that if the research sample banks were to experience funding gaps and non-performing loan crises, they would not require a long time to return to equilibrium and exit the crisis. However, banks would relatively need more time to recover from a capital adequacy crisis. The prediction results for the research sample banks for the period (2023-2027) showed that the research sample banks would not experience capital adequacy and funding gap crises except in some quarters of the prediction period. It was also observed that Al-Ahli Bank of Iraq and Ashur Bank did not experience non-performing loan crises during the prediction period, unlike Baghdad Bank, as the prediction results showed an increase in the ratio of non-performing loans to assets, reaching up to (13%).