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Self-fulfilling and Fundamental Banking Crises: A Multinomial Logit Approach

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  • Matias Fontenla

    ()
    (University of New Mexico)

  • Fidel Gonzalez

    ()
    (Sam Houston State University)

Abstract

This paper uses a multinomial logit model to examine the factors associated with the occurrence of both self-fulfilling and fundamental banking crises. We find evidence indicating that the two types of crises are indeed different, and are explained by different variables. Self-fulfilling crises tend to occur when bank liabilities relative to reserves are high, when the financial system is liberalized, and for high levels of short-term debt relative to total debt. They are also associated with lending booms and government surpluses. In contrast, fundamental crises are linked to depreciations of the local currency, to financial liberalization and are negatively related to the country's level of development and quality of institutions. Also, countries that experienced multiple crises are more likely to experience fundamental crises.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 6 (2007)
Issue (Month): 17 ()
Pages: 1-11

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Handle: RePEc:ebl:ecbull:eb-07f40002

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  1. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Cole, Harold L & Kehoe, Timothy J, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 91-116, January.
  4. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  5. Gary Gorton, 1986. "Banking panics and business cycles," Working Papers 86-9, Federal Reserve Bank of Philadelphia.
  6. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  7. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
  8. Freeman, Scott, 1988. "Banking as the Provision of Liquidity," The Journal of Business, University of Chicago Press, vol. 61(1), pages 45-64, January.
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Cited by:
  1. Ngalawa, Harold & Tchana Tchana, Fulbert & Viegi, Nicola, 2011. "Banking Instability and Deposit Insurance: The Role of Moral Hazard," MPRA Paper 31329, University Library of Munich, Germany.
  2. K. Batu Tunay, 2010. "Banking Crises and Early Warning Systems: A Model Suggestion for Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 4(1), pages 9-46.

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