Bank Reliability Assessment Model: Case of Latvia

Reliable and stable banks are an important precondition for the sustainable development of national economy. The objective of the chapter is to design a model allowing assessment of bank reliability in the context of bank financial strength. The model is designed using publicly available financial statement data of Latvian commercial banks, in the period of 2003–2016, macroeconomic data as well as aggregate statistical data of Latvian banking sector. The model allows calculation of ratings reflecting reliability level of banks. The model is designed based on the multiple choice model ordered logit. The chapter identifies the most important factors reflecting reliability level of banks, including shareholder equity ratio, profitability, assets structure, loan portfolio structure, and others. The assessment of bank reliability shows that the global financial crisis had a negative impact on Latvian commercial banks, revealing imbalances in bank operations and performance, causing decrease of profitability and deterioration of bank loan portfolios.