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Monitoring banking sector fragility : a multivariate logit approach with an application to the 1996-97 banking crises

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Author Info

  • Demirguc-Kunt, Asli
  • Detragiache, Enrica

Abstract

The authors explore how a multivariate logit empirical model of banking crisis probabilities can be used to monitor fragility in the banking sector. The proposed approach relies on readily available data, and the fragility assessment has a clear interpretation based on in-sample statistics. Also, the monitoring system can be tailored to fit the preferences of the decisionmakers, and the model has better in-sample performance than currently available alternatives. Despite these advantages, the monitoring system would have missed the 1997 banking crises in Indonesia, Malaysia, and the Republic of Korea, while it would have detected some weakness in Thailand and the Philippines. It would have clearly foreseen the 1996 crisis in Jamaica. Aggregate variables can convey information about general economic conditions often associated with fragility in the banking sectorbut are silent about the situation at individual banks or in specific segments of the banking sector - so crises that may develop from specific weaknesses in some market segments and spread through contagion would not be detected. The econometric study of systemic banking crises is a relatively new field of study. The development and evaluation of monitoring and forecasting tools based on the results of studies such as this are at an embryonic stage at best. The authors highlight elements that need to be evaluated in developing"ready-to-use"procedures for decision-makers and explore possible avenues for doing so. The monitoring system must be designed to fit the needs of policymakers, so systems must be developed as part of an interactive process involving both econometricians and decisionmakers.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2085.

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Date of creation: 31 Mar 1999
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Handle: RePEc:wbk:wbrwps:2085

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Related research

Keywords: Statistical&Mathematical Sciences; Banks&Banking Reform; Labor Policies; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Banks&Banking Reform; Statistical&Mathematical Sciences; Financial Crisis Management&Restructuring; Financial Intermediation; Economic Theory&Research;

References

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  1. 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.
  2. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-23, July.
  3. repec:fth:inadeb:318 is not listed on IDEAS
  4. Dooley, Michael P, 1996. "Capital Controls and Emerging Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 197-205, July.
  5. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
  6. Morris Goldstein & John Hawkins, 1998. "The Origin of the Asian Financial Turmoil," RBA Research Discussion Papers rdp9805, Reserve Bank of Australia.
  7. Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements.
  8. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
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Citations

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Cited by:
  1. Andrea Amaral & Margarida Abreu & Victor Mendes, 2010. "Contagion in Banking Crises: A Spatial Probit Model," Working Papers Department of Economics 2010/03, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
  3. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.

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