Political Instability and the Prediction of Financial Distress in European Banks

Abstract

This paper presents an investigation into the connection between the instability of political systems and financial distress in the banking industry. The purpose of the study was to build a model to predict financial distress and to investigate whether the inclusion of political stability factors could enhance the predictive ability of the model. Data from 103 European banks during the period 2013-2015 and the logistic regression technique were used to create the model. The results show that among the political variables, control of corruption and regulatory quality are significant indicators of financial distress. The findings also demonstrate that the inclusion of such variables does improve the predictive ability of the model.