The Market's View on the Probability of Banking Sector Failure: Cross-Country Comparisons
AbstractConsidering the increasingly international banks of today, the health of a country's banking sector is crucial not only to the country's growth and prosperity but also to the rest of the international financial community. Early warning signals of a banking sector in trouble or a pending banking crisis would therefore be of great value to both banks, investors and banking regulators/supervisors world wide. Different warning signals exist and in this paper we investigate how the stock market can provide a market-based indicator of banking sector health. Hall and Miles (1990) suggests an approach of estimating default probabilities of individual banks using only their stock market valuations and volatilities. In this paper we apply an aggregated version of their approach to banking sectors around the world in both developed and emerging economies and study the market's assessment of the probability of systemic banking crises in these countries over the last decade, including the Asian Crisis 1997-98. In addition, we investigate whether there is a relationship between the probability of banking sector failure and institutional/structural features of the actual banking sector. The quality of governance and the degree of law and order in a country is found to be significantly negatively related to the market based failure probabilities as is an explicit deposit insurance during periods of crisis.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 93.
Date of creation: 01 Feb 2003
Date of revision:
banking sector; banking crisis; default probability; market discipline;
Other versions of this item:
- Bystrom, Hans N. E., 2004. "The market's view on the probability of banking sector failure: cross-country comparisons," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(5), pages 419-438, December.
- Byström, Hans, 2003. "The Market’s View on the Probability of Banking Sector Failure: Cross-Country Comparisons," Working Papers 2003:2, Lund University, Department of Economics.
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-02 (All new papers)
- NEP-IFN-2004-06-02 (International Finance)
- NEP-SEA-2004-06-02 (South East Asia)
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