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The role of macroeconomic shocks in banking crises

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  • Pesola, Jarmo

    ()
    (Bank of Finland)

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    Abstract

    The macroeconomic reasons for the recent banking crises in the Nordic countries are analysed using an econometric model estimated with panel data from the 1980s and 1990s. Two alternative dependent variables are used: the ratio of banks’ loan losses to lending and enterprise bankruptcies per capita. The explanatory variables are the lagged dependent variable, lagged percentage change in GDP, an income surprise variable combined with lagged aggregate indebtedness, a real interest rate surprise variable combined with lagged aggregate indebtedness, and a deregulation dummy. The innovation in this paper is the use of surprise variables based on macroeconomic forecasts. According to the results, high indebtedness combined with negative macroeconomic surprises contributed to the recent banking crises in Sweden, Norway and Finland. Also the effects of the preceding financial liberalization and lending boom on bankruptcies and loan losses can be traced in the results. The econometric testing did not indicate direct effects of the exchange rate or the terms of trade on the banking crises. Denmark did not suffer a banking crisis because the macroeconomic surprises were smaller there and the initial debt burden was lighter than in the other Nordic countries. This was the result of, among other things, earlier financial deregulation, which was conducted in a fairly balanced way, and a different economic policy regime, as Denmark belonged to the ERM.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0106.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 6/2001.

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    Length: 64 pages
    Date of creation: 18 Apr 2001
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2001_006

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: financial deregulation; indebtedness; shock; loan loss; banking crisis;

    References

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    1. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis," IMF Occasional Papers 161, International Monetary Fund.
    2. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
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    10. Brunila, Anne & Takala, Kari, 1993. "Private Indebtedness and the Banking Crisis in Finland," Research Discussion Papers 9/1993, Bank of Finland.
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    14. William R. Keeton, 1999. "Does faster loan growth lead to higher loan losses?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 57-75.
    15. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
    16. King, Mervyn, 1994. "Debt deflation: Theory and evidence," European Economic Review, Elsevier, vol. 38(3-4), pages 419-445, April.
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    18. Malcolm Edey & Ketil Hviding, 1995. "An Assessment of Financial Reform in OECD Countries," OECD Economics Department Working Papers 154, OECD Publishing.
    19. Brenda González-Hermosillo & Ceyla Pazarbaşioğlu & Robert Billings, 1997. "Determinants of Banking System Fragility: A Case Study of Mexico," IMF Staff Papers, Palgrave Macmillan, vol. 44(3), pages 295-314, September.
    20. Paul Louis Ceriel Hilbers & Alfredo Mario Leone & Mahinder Singh Gill & Owen Evens, 2000. "Macroprudential Indicators of Financial System Soundness," IMF Occasional Papers 192, International Monetary Fund.
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