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Growth expectations and banking system fragility in developing economies

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  • Proto, Eugenio

    ()
    (University of Warwick, Department of Economics)

Abstract

The likelihood of a banking crisis appears to be higher in fast-developing countries. An explanation is provided in a Diamond and Dybvig framework, where banks are vehicles of consumption-smoothing, offering insurance against shocks to the consumption path of consumers. The theoretical model shows that the higher consumer growth expectations, the higher the optimal level of illiquidity insurance — even if it implies higher exposure bank runs. Empirical evidence supports this result and suggests that the effect of deposit interest rates on the probability of crisis is stronger after a period of high, uniterrupted growth. Policies of providing bail-outs or deposit insurance are demonstrated to be efficient even when they increase the fragility of the banking system.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp1305.pdf
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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 13/2005.

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Length: 32 pages
Date of creation: 07 Nov 2005
Date of revision:
Handle: RePEc:hhs:bofitp:2005_013

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
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Web page: http://www.suomenpankki.fi/bofit_en/
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References

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  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  2. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December.
  3. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  4. Barry Eichengreen & Carlos Arteta, 2001. "Banking Crises in Emerging Markets: Presumptions and Evidence," Macroeconomics, EconWPA 0012012, EconWPA.
  5. Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank.
  6. 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, University of Chicago Press, vol. 96(3), pages 568-92, June.
  7. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  8. Martin Browning & Thomas F. Crossley, 2001. "The lifecycle model of consumption and saving," IFS Working Papers, Institute for Fiscal Studies W01/15, Institute for Fiscal Studies.
  9. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 98/83, International Monetary Fund.
  10. Huberto M. Ennis & Todd Keister, 2003. "Economic growth, liquidity, and bank runs," Working Paper, Federal Reserve Bank of Richmond 03-01, Federal Reserve Bank of Richmond.
  11. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  12. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-21, C.V. Starr Center for Applied Economics, New York University.
  13. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
  14. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  15. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
  16. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 709-51, August.
  17. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 11-90, Wharton School Rodney L. White Center for Financial Research.
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