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Towards a Measure of Financial Fragility

  • Lea Zicchino
  • Dimitrios Tsomocos


  • Charles Goodhart


  • Oriol Aspachs Bracon


This paper proposes a measure of financial fragility that is based on economic welfare in a general model calibrated against UK data. The model comprises a household sector, three active hetrogeneous banks, a central bank/regulator, incomplete markets and endogenous default. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors and how the response of the economy to shocks relates to our measure of financial fragility. Finally we use panel VAR techniques to investigate the relationships between the factors that characterise financial fragility in our model i.e. banks' probabilities of default and banks' profits - to a proxy of welfare

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp554.

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Date of creation: Mar 2006
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Handle: RePEc:fmg:fmgdps:dp554
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  1. Dimitrios P Tsomocos, 2000. "Equilibrium Analysis, Banking and Financial Instability," Economics Series Working Papers 2003-FE-08, University of Oxford, Department of Economics.
  2. Dimitrios P Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," Bank of England working papers 175, Bank of England.
  3. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Model to Analyse Financial Fragility: Applications," OFRC Working Papers Series 2004fe05, Oxford Financial Research Centre.
  4. Dimitrios P Tsomocos & Charles A.E. Goodhart, 2003. "A Model to Analyse Financial Fragility," Economics Series Working Papers 2003-FE-13, University of Oxford, Department of Economics.
  5. 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.
  6. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A risk assessment model for banks," LSE Research Online Documents on Economics 24750, London School of Economics and Political Science, LSE Library.
  7. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
  8. Allen, William A. & Wood, Geoffrey, 2006. "Defining and achieving financial stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 152-172, June.
  9. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A time series analysis of financial fragility in the UK banking system," LSE Research Online Documents on Economics 24778, London School of Economics and Political Science, LSE Library.
  10. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  11. Dimitrios P. Tsomocos & Lea Zicchino, 2005. "On modelling endogenous default," LSE Research Online Documents on Economics 24667, London School of Economics and Political Science, LSE Library.
  12. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
  13. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  14. Mitchel Y. Abolafia (ed.), 2005. "Markets," Books, Edward Elgar, number 2788, April.
  15. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
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