The Determinants Of Banking Crises Evidence From Industrial And Developing Countries
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The Determinants of Banking Crises - Evidence from Developing and Developed Countries by Asli Demirgüç-Kunt,Enrica Detragiache Pdf
The paper studies the factors associated with the emergence of systemic banking crises in a large sample of developed and developing countries in 1980–94, using a multivariate logit econometric model. the results suggest that crises tend to erupt when the macroeconomic environment is weak, particularly when growth is low and inflation is high. Also, high real interest rates are clearly associated with systemic banking sector problems, and there is some evidence that vulnerability to balance of payments crises has played a role. Countries with an explicit deposit insurance scheme were particularly at risk, as were countries with weak law enforcement.
The Determinants of Banking Crises by Asli Demirgüç-Kunt Pdf
Vulnerability to crises in the banking sector appears to be associated with these factors: a weak macroeconomic environment characterized by slow GDP growth and high inflation, vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, past credit growth, the existence of explicit deposit insurance, and weak institutions.In the 1980s and 1990s several countries experienced banking crises. Demirguuml;ccedil;-Kunt and Detragiache try to identify features of the economic environment that tend to breed problems in the banking sector.They do so by econometrically estimating the probability of a systemic crisis, applying a multivariate logit model to data from a large panel of countries, both industrial and developing, for the period 1980-94. Included in the panel as controls are countries that never experienced banking problems.The authors find that crises tend to occur in a weak macroeconomic environment characterized by slow GDP growth and high inflation. When these effects are controlled for, neither the rate of currency depreciation nor the fiscal deficit are significant.Also associated with a higher probability of crisis are vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, and past credit growth.Another factor significantly (and robustly) associated with increased vulnerability in the banking sector is the presence of explicit deposit insurance, suggesting that moral hazard has played a major role.Finally, countries with weak institutions (as measured by a law and order index) are more likely to experience crises.This paper-a product of the Development Research Group, World Bank, and the Research Department, International Monetary Fund-is part of a larger effort to understand the causes of banking crises.
The Determinants of Banking Crises: Evidence from Industrial and Developing Countries by Asli Demirgüç-Kunt Pdf
September 1997 Vulnerability to crises in the banking sector appears to be associated with these factors: a weak macroeconomic environment characterized by slow GDP growth and high inflation, vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, past credit growth, the existence of explicit deposit insurance, and weak institutions. In the 1980s and 1990s several countries experienced banking crises. Demirgüç-Kunt and Detragiache try to identify features of the economic environment that tend to breed problems in the banking sector. They do so by econometrically estimating the probability of a systemic crisis, applying a multivariate logit model to data from a large panel of countries, both industrial and developing, for the period 1980-94. Included in the panel as controls are countries that never experienced banking problems. The authors find that crises tend to occur in a weak macroeconomic environment characterized by slow GDP growth and high inflation. When these effects are controlled for, neither the rate of currency depreciation nor the fiscal deficit are significant. Also associated with a higher probability of crisis are vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, and past credit growth. Another factor significantly (and robustly) associated with increased vulnerability in the banking sector is the presence of explicit deposit insurance, suggesting that moral hazard has played a major role. Finally, countries with weak institutions (as measured by a law and order index) are more likely to experience crises. This paper-a product of the Development Research Group, World Bank, and the Research Department, International Monetary Fund-is part of a larger effort to understand the causes of banking crises.
The Determinants of Banking Crises by Asli Demirgüç-Kunt Pdf
The paper studies the factors associated with the emergence of systemic banking crises in a large sample of developed and developing countries in 1980-94, using a multivariate logit econometric model. The results suggest that crises tend to erupt when the macroeconomic environment is weak, particularly when growth is low and inflation is high. Also, high real interest rates are clearly associated with systemic banking sector problems, and there is some evidence that vulnerability to balance of payments crises has played a role. Countries with an explicit deposit insurance scheme were particularly at risk, as were countries with weak law enforcement.
IMF Lending and Banking Crises by Luca Papi,Andrea Presbitero,Alberto Zazzaro Pdf
This paper looks at the effects of International Monetary Fund (IMF) lending programs on banking crises in a large sample of developing countries, over the period 1970-2010. The endogeneity of the IMF intervention is addressed by adopting an instrumental variable strategy and a propensity score matching estimator. Controlling for the standard determinants of banking crises, our results indicate that countries participating in IMF-supported lending programs are significantly less likely to experience a future banking crisis than nonborrowing countries. We also provide evidence suggesting that compliance with conditionality and loan size matter.
Foreign Bank Participation and Crises in Developing Countries by Robert J. Cull,Maria Soledad Martinez Peria Pdf
This paper describes the recent trends in foreign bank ownership in developing countries, summarizes the existing evidence on the causes and implications of foreign bank presence, and reexamines the link between banking crises and foreign bank participation. Using data on the share of banking sector assets held by foreign banks in over 100 developing countries during 1995-2002, the results show that countries that experienced a banking crisis tended to have higher levels of foreign bank participation than those that did not. Furthermore, panel regressions indicate that foreign participation increased as a result of crises rather than prior to them. However, post-crisis increases in foreign participation did not coincide with increased credit to the private sector, perhaps because in many cases foreign banks acquired distressed banks.
What Caused the Global Financial Crisis by Erlend Nier,Ouarda Merrouche Pdf
This paper investigates empirically the drivers of financial imbalances ahead of the global financial crisis. Three factors may have contributed to the build-up of financial imbalances: (i) rising global imbalances (capital flows), (ii) monetary policy that might have been too loose, (iii) inadequate supervision and regulation. Panel data regressions are performed for OECD countries from 1999 to 2007, so as to shed light on the relative importance of these factors, as well as the extent to which these factors might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up is amplified where the supervisory and regulatory environment was relatively weak. We find that, by contrast, differences in monetary policy cannot account for differences across countries in the build-up of financial imbalances ahead of the crisis.
How Do Banking Crises Affect Bilateral Exports? by Mr.Youssouf Kiendrebeogo Pdf
This paper investigates whether banking crises are associated with declines in bilateral exports. We first develop a simple open economy model in which banking crises translate into negative liquidity shocks, leading to collapses in exports through supply-side and demand-side shocks. We then estimate a gravity model using a sample of developed and developing countries over the period 1988-2010. The results suggest that crisis-hit countries experience lower levels of bilateral exports, particularly in developing countries where supply-side shocks are found to be relatively more important than demand shocks. In developing countries, exports of manufactured goods are disproportionately hurt by banking crises and this negative effect is stronger in industries relying more on external finance. These findings are robust to correcting for potential endogeneity, to changes in the sample, and to alternative estimation methods.
Banking Crises in Latin America by Ricardo Hausmann,Liliana Rojas-Suárez Pdf
Banking crises occur in both industrial and developing countries, but in Latin America they last longer, affect a larger segment of the banking industry and cost the public more. In Banking Crises in Latin America, distinguished policymakers, academicians and bankers examine the main causes of such crises, how governments can manage them more effectively, and how they can be prevented. The six sections of the book focus on the salient features of Latin American banking systems, the macroeconomic causes of banking crises, the microeconomic factors leading to bank difficulties, and the particular constraints that make the management of banking crises more complicated in Latin America than in industrial countries. Policy recommendations at both the macro- and microeconomic level aim to improve the resilience of banking systems to unanticipated shocks. The last section of the book turns the focus to experiences of individual countries. Contributors include Eduardo Aninat, Guillermo Calvo, Michel Camdessus, Sebastian Edwards, Enrique Iglesias, Lawrence Summers and Paul Volcker.
Cross-country Empirical Studies of Systemic Bank Distress by Aslı Demirgüç-Kunt,Enrica Detragiache Pdf
"A rapidly growing empirical literature is studying the causes and consequences of bank fragility in contemporary economies. The authors review the two basic methodologies adopted in cross-country empirical studies-the signals approach and the multivariate probability model-and their application to study the determinants of banking crises. The use of these models to provide early warnings for crises is also reviewed, as are studies of the economic effects of banking crises and of the policies to forestall them. The paper concludes by identifying directions for future research." -- Cover verso.
Financial Crises Explanations, Types, and Implications by Mr.Stijn Claessens,Mr.Ayhan Kose Pdf
This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
The Real Effect of Banking Crises by Giovanni Dell'Ariccia,Raghuram Rajan,Enrica Detragiache Pdf
Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank-dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises have been more severe.
Global Waves of Debt by M. Ayhan Kose,Peter Nagle,Franziska Ohnsorge,Naotaka Sugawara Pdf
The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.
Globalization, Politics, and Financial Turmoil by Shanker Satyanath Pdf
It focuses on the role of miscommunication in the financial crises of developing nations. By examining the determinants of Asia's financial crisis of 1997-98, it demonstrates why developing democracies are vulnerable to breakdowns in communication and outlines the disastrous consequences of such breakdowns.
