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Self-fulfilling and Fundamental Banking Crises: A Multinomial Logit Approach

  • Matias Fontenla


    (University of New Mexico)

  • Fidel Gonzalez


    (Sam Houston State University)

This paper uses a multinomial logit model to examine the factors associated with the occurrence of both self-fulfilling and fundamental banking crises. We find evidence indicating that the two types of crises are indeed different, and are explained by different variables. Self-fulfilling crises tend to occur when bank liabilities relative to reserves are high, when the financial system is liberalized, and for high levels of short-term debt relative to total debt. They are also associated with lending booms and government surpluses. In contrast, fundamental crises are linked to depreciations of the local currency, to financial liberalization and are negatively related to the country's level of development and quality of institutions. Also, countries that experienced multiple crises are more likely to experience fundamental crises.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 6 (2007)
Issue (Month): 17 ()
Pages: 1-11

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Handle: RePEc:ebl:ecbull:eb-07f40002
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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
  3. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December.
  4. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  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. Freeman, Scott, 1988. "Banking as the Provision of Liquidity," The Journal of Business, University of Chicago Press, vol. 61(1), pages 45-64, January.
  7. repec:bla:restud:v:67:y:2000:i:1:p:91-116 is not listed on IDEAS
  8. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
  9. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
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