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

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.