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Monitoring Systemic Risk Basedon Dynamic Thresholds

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  • Kasper Lund-Jensen
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    Abstract

    Successful implementation of macroprudential policy is contingent on the ability to identify and estimate systemic risk in real time. In this paper, systemic risk is defined as the conditional probability of a systemic banking crisis and this conditional probability is modeled in a fixed effect binary response model framework. The model structure is dynamic and is designed for monitoring as the systemic risk forecasts only depend on data that are available in real time. Several risk factors are identified and it is hereby shown that the level of systemic risk contains a predictable component which varies through time. Furthermore, it is shown how the systemic risk forecasts map into crisis signals and how policy thresholds are derived in this framework. Finally, in an out-of-sample exercise, it is shown that the systemic risk estimates provided reliable early warning signals ahead of the recent financial crisis for several economies.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/159.

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    Length: 36
    Date of creation: 01 Jun 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/159

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    Related research

    Keywords: Financial stability; Macroprudential Policy; Banking crisis; Banking sector; Economic models; Financial risk; banking; systemic risk; systemic banking crisis; banking crises; systemic banking crises; contagion; bank liabilities; crisis probability; bank runs; banking distress; probability model; deposit insurance; financial crisis; competitiveness; banking sector fragility; credit boom; systemic banking distress; banking system distress; early warning systems; banking system; credit booms; bank default; financial crises; early warning system; bank distress; debt crisis; financial liberalization; financial contagion; systemic crisis; banking system stability; recession; economic recession; balance of payments crisis; payments crisis; bank defaults; resolution of banking crises; bank of england; central banking; bank policy;

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    References

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
    2. Domac, Ilker & Martinez Peria, Maria Soledad, 2003. "Banking crises and exchange rate regimes: is there a link?," Journal of International Economics, Elsevier, vol. 61(1), pages 41-72, October.
    3. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    4. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100.
    5. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    6. Lancaster, Tony, 2000. "The incidental parameter problem since 1948," Journal of Econometrics, Elsevier, vol. 95(2), pages 391-413, April.
    7. Davis, E. Philip & Karim, Dilruba, 2008. "Comparing early warning systems for banking crises," Journal of Financial Stability, Elsevier, vol. 4(2), pages 89-120, June.
    8. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
    9. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
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    Cited by:
    1. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
    2. Judith Eidenberger & Benjamin Neudorfer & Michael Sigmund & Ingrid Stein, 2013. "Quantifying Financial Stability in Austria – New Tools for Macroprudential Supervision," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 26, pages 62-81.

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