United States banking stability: An explanation through machine learning

Abstract

In this paper, an analysis of the prediction of bank stability in the United States from 1990 to 2017 is carried out, using bank solvency, delinquency and an ad hoc bank stability indicator as variables to measure said stability. Different machine learning assembly models have been used in the study, a random forest is developed because it is the most accurate of all those tested. Another novel element of the work is the use of partial dependency graphs (PDP) and individual conditional expectation curves (ICES) to interpret the results that allow observing for specific values how the banking variables vary, when the macro-financial variables vary.It is concluded that the most determining variables to predict bank solvency in the United States are interest rates, specifically the mortgage rate and the 5 and 10-year interest rates of treasury bonds, reducing solvency as these rates increase. For delinquency, the most important variable is the unemployment rate in the forecast. The financial stability index is made up of the normalized difference between the two factors obtained, one for solvency and the other for delinquency. The index prediction concludes that stability worsens as BBB corporate yield increases.