matrix of correlated returns on assets, and the bank-speciﬁc insolvency risk. As an
important regulatory implication, Acharya (2009) showed that bank-level capital
requirements do not necessarily result in a corresponding one-to-one increase in systemic
stability, but in fact may even accentuate the problem. Indeed, the shift in post-crisis
regulatory thinking, as evidenced by the Basel III reform, now puts more emphasis on the
segregation of micro and macro-dimensions of the prudential regulation, and on the
applicability of different regulatory instruments while taking into account the respective
Despite the emerged literature on macroprudential policy, the bank-speciﬁc insolvency
risk continues to be of great interest and relevance among researchers and policymakers.
This is since ﬁnancial distress, self-evidently, results from contagiously transmitted
negative externalitiesgenerated by bank failures. This study contributes to the literature on
bank insolvency risk in two ways. Using representative data on Finnish unlisted
cooperative and savings banks, prior ﬁndings regarding some of the bank-speciﬁc factors
are replicated and conﬁrmed.Secondly, results suggest that Finnish banks have become less
fragile under the CRD IV regulation. For practicalreasons, “risk”is explicitly deﬁned as the
distance to default. Accordingly,three different accounting-based, time-varying Z-scoresare
constructed in order to capture the insolvency risk in a uniform and compatible manner.
This approach has been supported in the literature due to its pervasive nature unlike, for
instance, another widely used, but visibly more speciﬁc measure of credit risk that is
commonly approximated by the ratio of non-performingloans to total gross loans. (Agoraki
2. Research scope and related literature
Closely following analogous studies on bank risk, the effects of both bank-speciﬁc and
macroeconomic factors are considered. In particular, the research scope is speciﬁed by the
H1. There exists a positive relationshipbetween inﬂation rate and insolvency risk.
The evidence in this regard is somewhat ambiguous. Uhde and Heimeshoff (2009) suggest
that the effect of change in inﬂation rate depends on how strong the surrounding economic
environment is otherwiseand whether banks anticipate the change. Jiménez et al. (2008) ﬁnd
that higher inﬂation during the life of the loan reduces credit risk whereas higher inﬂation
preceding the loan decision implies higherrisk-taking. Baselga-Pascual et al. (2015) and Ben
Bouheni (2014) show that an increase in inﬂation ratecauses a consequent increase in both
insolvency risk and credit risk. While Ben Jabra et al. (2017) report similar ﬁndings on
insolvency risk, they conversely ﬁnd a negative relationship between inﬂation rate and
credit risk. Rather than focusingon the effect of interest rates per se, this study includes the
three-month Euribor rate to control for the joint dynamics of inﬂation and interest rates.
Uhde and Heimeshoff (2009)suggested that since interest rates tend to rise in the presence or
in anticipation of inﬂation, it might lead to a corresponding increase in net interest income
H2. There exists a negativerelationship between economic growth and insolvencyrisk.
Positive general macroeconomicdevelopment, measured in gross domestic product growth,
improves economic agents’ability to manage and pay back their debt. However, as the
default rates are cyclical innature (for instance Marcucci and Quagliariello, 2008), the credit
expansion duringthe economic boom causes a coincidental increase in lower-quality debtors