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How Well Do Aggregate Bank Ratios Identify Banking Problems?

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Author Info

  • Martin Cihák
  • Klaus Schaeck

Abstract

The paper provides an empirical analysis of aggregate banking system ratios during systemic banking crises. Drawing upon a wide cross-country dataset, we utilize parametric and nonparametric tests to assess the power of these ratios to discriminate between sound and unsound banking systems. We also estimate a duration model to investigate whether the ratios help determine the timing of a banking crisis. Despite some weaknesses in the available data, our findings offer initial evidence that some indicators are precursors for the likelihood and timing of systemic banking problems. Nevertheless, we caution against sole reliance on these indicators and advocate supplementing them with other tools and techniques.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/275.

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Length: 40
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/275

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Postal: International Monetary Fund, Washington, DC USA
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Fax: (202) 623-4661
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Web page: http://www.imf.org/external/pubind.htm
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Related research

Keywords: Financial soundness indicators; Banks; Economic models; banking; banking crises; capital adequacy; return on equity; banking crisis; banking system; banking systems; bank runs; crisis countries; deposit insurance; bank data; capital adequacy ratio; banking sector; systemic banking crisis; corporate sector; early warning systems; crisis episodes; systemic banking crises; banking supervision; banking system vulnerabilities; systemic crisis; bank regulation; bank failure; contagion; banking system fragility; bank regulators; early warning system; banking distress; financial crises; systemic risk; foreign exchange; bank distress; borderline financial crises; banking sector fragility; bank entry; deposit guarantees; recessions; probability model; credit booms; financial integration; financial crisis; crisis country; banking industry; federal deposit insurance; banking panics; banking sector stability; bank soundness; bank panic; financial distress; bank failures; bank fragility; crisis episode; denominated loans; bank managers; nationalization of banks; subordinated debt; financial liberalization; return on assets; crisis problem; causes of banking crises; bank for international settlements; crisis economy; foreign exchange exposure; bank capital; currency crises; retained earnings; bank independence; liquid asset; banking sector problems;

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Citations

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Cited by:
  1. Cihák, Martin & Schaeck, Klaus, 2010. "How well do aggregate prudential ratios identify banking system problems?," Journal of Financial Stability, Elsevier, vol. 6(3), pages 130-144, September.
  2. Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Working Paper Research 167, National Bank of Belgium.
  3. Tao Sun, 2011. "Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-Financial Linkages Framework," IMF Working Papers 11/111, International Monetary Fund.
  4. Martin Cihak, 2009. "Financial Crisis (introduction)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(6), pages 502-506, December.
  5. Radu Muntean, 2009. "Early Warning Models for Banking Supervision in Romania," Advances in Economic and Financial Research - DOFIN Working Paper Series 39, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
  6. Patrick Honohan, 2008. "Risk Management and the Costs of the Banking Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp262, IIIS.
  7. Tigran Poghosyan & Martin Cihák, 2009. "Distress in European Banks," IMF Working Papers 09/9, International Monetary Fund.
  8. Patrick Honohan, 2008. "Bank Failures: The Limitations of Risk Modelling," The Institute for International Integration Studies Discussion Paper Series iiisdp263, IIIS.

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