Estimating probability of banking crises using random forest

Abstract

Banks have a crucial role in the financial system. When many banks suffer from the crisis, it can lead to financial instability. According to the impact of the crises, the banking crisis can be divided into two categories, namely systemic and non-systemic crisis. When systemic crises happen, it may cause even stable banks bankrupt. Hence, this paper proposed a random forest for estimating the probability of banking crises as prevention action. Random forest is well-known as a robust technique both in classification and regression, which is far from the intervention of outliers and overfitting. The experiments were then constructed using the financial crisis database, containing a sample of 79 countries in the period 1981-1999 (annual data). This dataset has 521 samples consisting of 164 crisis samples and 357 non-crisis cases. From the experiments, it was concluded that utilizing 90 percent of training data would deliver 0.98 accuracy, 0.92 sensitivity, 1.00 precision, and 0.96 F1-Score as the highest score than other percentages of training data. These results are also better than state-of-the-art methods used in the same dataset. Therefore, the proposed method is shown promising results to predict the probability of banking crises.