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Default, Credit Growth, and Asset Prices

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  • C. A. E. Goodhart
  • Miguel A. Segoviano Basurto
  • Boris Hofmann

Abstract

This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/223.

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Length: 43
Date of creation: 01 Sep 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/223

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Keywords: Credit risk; Stress testing; Bank credit; Bank soundness; Economic models; banking; bank lending; probability; probability of default; statistics; financial statistics; bank for international settlements; statistic; error variance; time series; banking crises; foreign exchange; banking system; correlation; commercial property; equation; standard error; survey; covariance; standard errors; banking sector; banks ? balance sheets; data analysis; estimation procedure; banking systems; real variables; time series analysis; bank profitability; samples; explanatory power; goodness of fit; probabilities; disintermediation; standard deviation; monte carlo simulation; bank risk; banking sector problems; prediction; forecasting; statistician; bank profits; bank regulations; empirical model; level playing field; empirical exercise; normal distribution; mean square; empirical framework; bank lending rates; interbank money market; foreign exchange market; banking supervision; integral; banking industry; bank regulation; maximum-likelihood estimation; bank of england; bank capital; correlations; banking crisis; var model; banking distress; systemic banking distress; bank equity; bank loans; bank lending behavior; general equilibrium model; optimization; probability distribution; equations; financial risk; capital adequacy;

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References

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Citations

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Cited by:
  1. Jong Lee & Jaemin Ryu & Dimitrios Tsomocos, 2013. "Measures of systemic risk and financial fragility in Korea," Annals of Finance, Springer, vol. 9(4), pages 757-786, November.
  2. Mark Swinburne & Stéphanie Marie Stolz & Marina Moretti, 2008. "Stress Testing At the IMF," IMF Working Papers 08/206, International Monetary Fund.
  3. C. A. E. Goodhart & Miguel A. Segoviano Basurto, 2009. "Banking Stability Measures," IMF Working Papers 09/4, International Monetary Fund.

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