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European Banking Distress and EMU: Institutional and Macroeconomic Risks

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  • Michael M. Hutchison

Abstract

Financial stability in Europe has received renewed attention with the advent of a common currency, wave of mergers and acquisitions among financial institutions, and greater market competition (e.g. ECB, 1999; IMF, 1999; OECD, 1999). This paper examines whether EU country banking systems are particularly vulnerable to systemic risk at present. Our approach is to examine episodes of banking sector distress for a large sample of countries, highlighting the experience of the EU. We estimate multivariate probit models linking the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. Institutional characteristics, made available by a new data set on corporate governance in the financial sector not previously used in this type of analysis, include aspects of bank supervision and regulation, restrictions on bank portfolios, and development of the banking system. Given these characteristics, the model predicts a low probability of banking sector distress in EMU countries.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 00-04.

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Handle: RePEc:kud:epruwp:00-04

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  1. Eichengreen, B., 1992. "Should the Maastricht Treaty be Saved?," Princeton Studies in International Economics 74, International Economics Section, Departement of Economics Princeton University,.
  2. Gertler, Mark, 1992. "Financial Capacity and Output Fluctuations in an Economy with Multi-period Financial Relationships," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 455-72, July.
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  4. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, December.
  5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  6. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
  7. 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.
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Cited by:
  1. Julian Caballero, 2012. "Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises? Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom- Bust Cycles," Research Department Publications 4775, Inter-American Development Bank, Research Department.
  2. Christian Calmès & Raymond Théoret, 2012. "Bank systemic risk and the business cycle: Canadian and U.S. evidence," RePAd Working Paper Series UQO-DSA-wp022012, Département des sciences administratives, UQO.
  3. Christian Calmès & Raymond Théoret, 2011. "Bank systemic risk and the business cycle: An empirical investigation using Canadian data," RePAd Working Paper Series UQO-DSA-wp322011, Département des sciences administratives, UQO.
  4. Jokipii , Terhi & Lucey, Brian, 2006. "Contagion and interdependence: measuring CEE banking sector co-movements," Research Discussion Papers 15/2006, Bank of Finland.
  5. Rudolfs Bems & Kristian Jönsson Hartelius, 2006. "Trade Deficits in the Baltic States: How Long Will the Party Last?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 179-209, January.
  6. Edward J. Kane, 2005. "Can the European Community Afford to Neglect the Need for More Accountable Safety-Net Management?," NBER Working Papers 11860, National Bureau of Economic Research, Inc.
  7. Tao Sun, 2011. "Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-Financial Linkages Framework," IMF Working Papers 11/111, International Monetary Fund.
  8. Sònia Muñoz & Ryan Scuzzarella & Martin Cihák, 2011. "The Bright and the Dark Side of Cross-Border Banking Linkages," IMF Working Papers 11/186, International Monetary Fund.

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