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Assessing the risk of banking crises

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  • Claudio Borio
  • Philip Lowe

Abstract

Over the last two decades, banking crises have become more frequent and severe in both emerging market and industrial countries.2 Their cost in terms of output lost has been high, typically double digit percentages of GDP. For this reason, considerable efforts have been made recently to develop “early warning indicators” of crises that could allow policymakers to take remedial action in a more timely fashion. This special feature proposes a set of forward-looking indicators of banking distress. As in Borio and Lowe (2002) we argue that it may be possible recognise the build-up of one set of vulnerabilities that foreshadows banking distress with a reasonable degree of confidence, although the exact timing of the crises remains unpredictable. The corresponding indicators draw exclusively on ex ante information, are based on the interaction among a small set of variables, focus on the cumulative processes giving rise to distress and allow for variable horizons. Here we extend our previous work, which had mainly considered credit aggregate and asset prices, by examining the information contained in real exchange rate appreciations and the relative performance of indicators in industrial and emerging market countries. In the first section of this article we briefly discuss the origins of banking crises. In the second we motivate the choice of indicators and assess their performance. In the concluding section we note some caveats to the analysis and suggest areas for future work.

Suggested Citation

  • Claudio Borio & Philip Lowe, 2002. "Assessing the risk of banking crises," BIS Quarterly Review, Bank for International Settlements, December.
  • Handle: RePEc:bis:bisqtr:0212e
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    References listed on IDEAS

    as
    1. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57, Bank for International Settlements.
    2. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
    3. Barry Eichengreen and Carlos Arteta., 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research (CIDER) Working Papers C00-115, University of California at Berkeley.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Christopher Kent & Patrick D'Arcy, 2001. "Cyclical prudence - credit cycles in Australia," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 58-90, Bank for International Settlements.
    6. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    7. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
    8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    9. Marc Klau & John Hawkins, 2000. "Measuring potential vulnerabilities in emerging market economies," BIS Working Papers 91, Bank for International Settlements.
    10. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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