Misclassification of unsatisfactory banks as satisfactory is referred to as a "type-1 error." The second type of error is to misclassify satisfactory banks as unsatisfactory, a "type-2 error." The cost of a type- 1 error can be high because it can result in a bank failure that might have been prevented by early supervisory intervention.
FIMS incorrectly identified approximately 17.1 percent of the unsatisfactory banks as satisfactory (type-1 error) while incorrectly identifying 7.4 percent of the satisfactory banks as unsatisfactory (type-2 error).
Such an adjustment would increase the number of banks classified correctly as unsatisfactory and decrease type-1 error, but at the cost of decreasing the number of satisfactory banks correctly classified and increasing type-2 error. A larger percentage of the unsatisfactory banks would be identified, but a larger percentage of satisfactory banks would be misclassified.