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Decomposing Financial Risks and Vulnerabilities in Emerging Europe

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  • Andrea M Maechler
  • Srobona Mitra
  • Delisle Worrell
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    Abstract

    This paper assesses how various types of financial risk such as credit risk, market risk, and liquidity risk affect banking stability in emerging Europe. It also examines how the quality of supervisory standards may have mitigated the vulnerabilities arising from these risk factors. Using panel data, the paper finds that (1) credit quality is of general concern especially in circumstances where credit growth is accelerating; (2) although higher provisioning could adversely affect profits and returns volatility, good supervisory policies on provisioning mitigate such adverse effects; and (3) highly liquid banks are not necessarily more stable because they might be pursuing activities with more volatile returns, but a well-functioning payments system helps to lower the adverse impact on stability. The paper also corroborates earlier evidence of the positive (negative) effect of financial depth (foreign ownership) on stability.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

    Volume (Year): 57 (2010)
    Issue (Month): 1 (April)
    Pages: 25-60

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    Handle: RePEc:pal:imfstp:v:57:y:2010:i:1:p:25-60

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    References

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    1. Richard Podpiera, 2006. "Does Compliance with Basel Core Principles Bring Any Measurable Benefits?," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 5.
    2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    3. Niamh Sheridan & Alfred Schipke & Susan Mary George & Christian H. Beddies, 2004. "Capital Markets and Financial Intermediation in The Baltics," IMF Occasional Papers, International Monetary Fund 228, International Monetary Fund.
    4. Ilko Naaborg & Bert Scholtens & Jakob de Haan & Hanneke Bol & Ralph de Haas, 2004. "How Important are Foreign Banks in the Financial Development of European Transition Countries?," Journal of Emerging Market Finance, Institute for Financial Management and Research, Institute for Financial Management and Research, vol. 3(2), pages 99-123, August.
    5. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
    6. Manna, Michele, 2004. "Developing statistical indicators of the integration of the euro area banking system," Working Paper Series, European Central Bank 0300, European Central Bank.
    7. International Monetary Fund, 2007. "Vulnerabilities in Emerging Southeastern Europe," IMF Working Papers, International Monetary Fund 07/236, International Monetary Fund.
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