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The early warnings of banking crises: Interaction of broad liquidity and demand deposits

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  • Lang, Michael
  • Schmidt, Paul G.

Abstract

This paper explores the fundamentals in the run-up to systemic banking crises. It applies a visualisation approach that combines elements of an event study analysis and a fan chart technique. The approach helps identify potential leading indicators. A multivariate analysis follows. This paper presents a new early warning system for banking crises built upon these indicators. The interaction of liquidity ratio and loss of demand deposits is incorporated into the model and substantially improves the results. The selected factors are highly statistically significant and robust. The out-of-sample forecasts demonstrate the strong predictive power of the model.

Suggested Citation

  • Lang, Michael & Schmidt, Paul G., 2016. "The early warnings of banking crises: Interaction of broad liquidity and demand deposits," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 1-29.
    • Handle: RePEc:eee:jimfin:v:61:y:2016:i:c:p:1-29
    DOI: 10.1016/j.jimonfin.2015.11.003
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    More about this item

    Keywords

    Banking crises; International capital flows; Interaction of liquid assets and deposits; Financial sector vulnerability; Early warning system;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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