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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. 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.
    2. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
    3. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper 9822, Federal Reserve Bank of New York.
    4. Eichengreen, Barry & Arteta, Carlos, 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research, Working Paper Series qt3pk9t1h2, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    5. Graciela Laura Kaminsky, 1999. "Currency and Banking Crises - The Early Warnings of Distress," IMF Working Papers 99/178, International Monetary Fund.
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    7. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
    8. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
    9. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    10. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," NBER Working Papers 5576, National Bureau of Economic Research, Inc.
    11. Daniel C. Hardy & Ceyla Pazarbasioglu, 1999. "Determinants and Leading Indicators of Banking Crises: Further Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 46(3), pages 1.
    12. Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises: Pitfalls in Financial Liberalization?," IMF Working Papers 95/61, International Monetary Fund.
    13. Eichengreen, Barry & Rose, Andrew K, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," CEPR Discussion Papers 1828, C.E.P.R. Discussion Papers.
    14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    15. International Monetary Fund, 1998. "Leading Indicators of Banking Crises-Was Asia Different?," IMF Working Papers 98/91, International Monetary Fund.
    16. 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.
    17. King, Mervyn, 1994. "Debt deflation: Theory and evidence," European Economic Review, Elsevier, vol. 38(3-4), pages 419-445, April.
    18. Malcolm Edey & Ketil Hviding, 1995. "An Assessment of Financial Reform in OECD Countries," OECD Economics Department Working Papers 154, OECD Publishing.
    19. Brunila, Anne & Takala, Kari, 1993. "Private Indebtedness and the Banking Crisis in Finland," Research Discussion Papers 9/1993, Bank of Finland.
    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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