Identifying troubled banks. How should the banking authority measure financial fragility?

This article examines the measurement of financial fragility in the Peruvian banking system using an innovative approach that combines micro- and macroeconomic variables. The research focuses on the early identification of troubled banks between January 1995 and April 2000, using a fixed-effects panel data logit model. Two indicators are evaluated: the ratio of nonperforming loans to gross loans and the CAMEL index. The results indicate that the selected variables are effective in predicting banking fragility, showing an increase in the system’s vulnerability toward the end of 1999. The combination of both methodologies minimizes intervention costs and improves the allocation of supervisory resources by the authorities. The policy implications highlight the need for ongoing and adaptive monitoring to prevent crises in the financial system, proposing the use of early-warning models as key tools for preventing bank failures. This underscores the importance of proactive measures in banking regulation and supervision in changing macroeconomic environments. (Abstract and audio: Department of Economic Publications)