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How well do aggregate prudential ratios identify banking system problems?

Listed author(s):
  • Cihák, Martin
  • Schaeck, Klaus

Aggregate prudential ratios have become a mainstay of financial stability analysis. But how reliable are these indicators when it comes to distinguishing between strong and weak banking systems? We address this issue by analyzing the performance of aggregate prudential ratios in systemic banking crises, drawing upon a large cross-country dataset. We caution against sole reliance on these indicators, and advocate supplementing them with other tools and techniques. Nonetheless, our findings offer evidence that some of the ratios can help identify systemic banking problems.

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File URL: http://www.sciencedirect.com/science/article/pii/S1572-3089(10)00030-6
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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 6 (2010)
Issue (Month): 3 (September)
Pages: 130-144

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Handle: RePEc:eee:finsta:v:6:y:2010:i:3:p:130-144
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
  2. International Monetary Fund, 2002. "Financial Soundness Indicators; Analytical Aspects and Country Practices," IMF Occasional Papers 212, International Monetary Fund.
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  4. Martin Cihak & Klaus Schaeck, 2007. "How Well Do Aggregate Bank Ratios Identify Banking Problems?," IMF Working Papers 07/275, International Monetary Fund.
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  19. Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001. "Costs of banking system instability: some empirical evidence," Bank of England working papers 144, Bank of England.
  20. Buch, Claudia M. & DeLong, Gayle, 2008. "Do weak supervisory systems encourage bank risk-taking?," Journal of Financial Stability, Elsevier, vol. 4(1), pages 23-39, April.
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