A Comparison of Various Artificial Intelligence Methods in the Prediction of Bank Failures

The strong relationship between bank failure and economic growth attaches far more importance to the predictability of bank failures. Consequently, numerous statistical prediction models exist in the literature focusing on this particular subject. Besides, artificial intelligence techniques began to attain an increasing level of importance in the literature due to their predictive success. This study distinguishes itself from the similar ones in the sense that it presents a comparison of three different artificial intelligence methods, namely support vector machines (SVMs), radial basis function neural network (RBF-NN) and multilayer perceptrons (MLPs); in addition to subjecting the explanatory variables to principal component analysis (PCA). The extent of this study encompasses 37 privately owned commercial banks (17 failed, 20 non-failed) that were operating in Turkey for the period of 1997-2001. The main conclusions drawn from the study can be summarized as follows: (i) PCA does not appear to be an effective method with respect to the improvement of predictive power; (ii) SVMs and RBF demonstrated similar levels of predictive power; albeit SVMs was found to be the best model in terms of total predictive power; (iii) MLPs method stood out among the SVMs and RBF methods in a negative sense and exhibits the lowest predictive power.