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Default, Credit Growth, and Asset Prices

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  • C. A. E. Goodhart
  • Miguel A. Segoviano Basurto
  • Boris Hofmann

Abstract

This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy.

Suggested Citation

  • C. A. E. Goodhart & Miguel A. Segoviano Basurto & Boris Hofmann, 2006. "Default, Credit Growth, and Asset Prices," IMF Working Papers 06/223, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/223
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    Cited by:

    1. Pallavi Chavan & Leonardo Gambacorta, 2016. "Bank lending and loan quality: the case of India," BIS Working Papers 595, Bank for International Settlements.
    2. C. A. E. Goodhart & Miguel A. Segoviano Basurto, 2009. "Banking Stability Measures," IMF Working Papers 09/4, International Monetary Fund.
    3. Mark Swinburne & Stéphanie Marie Stolz & Marina Moretti, 2008. "Stress Testing at the IMF," IMF Working Papers 08/206, International Monetary Fund.
    4. Chaibi, Hasna & Ftiti, Zied, 2015. "Credit risk determinants: Evidence from a cross-country study," Research in International Business and Finance, Elsevier, vol. 33(C), pages 1-16.
    5. Jong Lee & Jaemin Ryu & Dimitrios Tsomocos, 2013. "Measures of systemic risk and financial fragility in Korea," Annals of Finance, Springer, vol. 9(4), pages 757-786, November.

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