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The Anatomy of Banking Crises

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Author Info
Paul Cashin
Rupa Duttagupta

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Abstract

This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/93.

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Length: 37 pages
Date of creation: 22 Apr 2008
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Handle: RePEc:imf:imfwpa:08/93

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  1. 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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  2. Alejandro Gaytán & Christian A. Johnson, 2002. "A Review of the Literature on Early Warning Systems for Banking Crises," Working Papers Central Bank of Chile 183, Central Bank of Chile. [Downloadable!]
  3. Gavin, M. & Hausmann, R., 1996. "The Roots of Banking Crises: The Macroeconomic Context," RES Working Papers 318, Inter-American Development Bank, Research Department.
  4. Paolo Manasse & Nouriel Roubini, 2005. "'Rules of Thumb' for Sovereign Debt Crises," International Finance 0509003, EconWPA. [Downloadable!]
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  5. Barry Eichengreen & Carlos Arteta, 2006. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research, Working Paper Series 1007, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  6. Gianni De Nicoló & Alain Ize & Patrick Honohan, 2003. "Dollarization of the Banking System: Good or Bad?," IMF Working Papers 03/146, International Monetary Fund. [Downloadable!]
    Other versions:
  7. Gavin, M. & Hausmann, R., 1996. "The Roots of Banking Crises: The Macroeconomic Context," RES Working Papers 318, Inter-American Development Bank, Research Department.
  8. Brenda González-Hermosillo, 1999. "Determinants of Ex-Ante Banking System Distress: A Macro-Micro Empirical Exploration of Some Recent Episodes," IMF Working Papers 99/33, International Monetary Fund.
  9. Asli Demirguc-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(1), pages 3. [Downloadable!] (restricted)
  10. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Marcos Chamon & Paolo Manasse & Alessandro Prati, 2007. "Can We Predict the Next Capital Account Crisis?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 54(2), pages 270-305, June. [Downloadable!] (restricted)
  12. Bongini, Paola & Claessens, Stijn & Ferri, Giovanni, 2000. "The political economy of distress in East Asian financial institutions," Policy Research Working Paper Series 2265, The World Bank. [Downloadable!]
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