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Monitoring banking sector fragility : a multivariate logit approach with an application to the 1996-97 banking crises

  • Demirguc-Kunt, Asli
  • Detragiache, Enrica

The authors explore how a multivariate logit empirical model of banking crisis probabilities can be used to monitor fragility in the banking sector. The proposed approach relies on readily available data, and the fragility assessment has a clear interpretation based on in-sample statistics. Also, the monitoring system can be tailored to fit the preferences of the decisionmakers, and the model has better in-sample performance than currently available alternatives. Despite these advantages, the monitoring system would have missed the 1997 banking crises in Indonesia, Malaysia, and the Republic of Korea, while it would have detected some weakness in Thailand and the Philippines. It would have clearly foreseen the 1996 crisis in Jamaica. Aggregate variables can convey information about general economic conditions often associated with fragility in the banking sectorbut are silent about the situation at individual banks or in specific segments of the banking sector - so crises that may develop from specific weaknesses in some market segments and spread through contagion would not be detected. The econometric study of systemic banking crises is a relatively new field of study. The development and evaluation of monitoring and forecasting tools based on the results of studies such as this are at an embryonic stage at best. The authors highlight elements that need to be evaluated in developing"ready-to-use"procedures for decision-makers and explore possible avenues for doing so. The monitoring system must be designed to fit the needs of policymakers, so systems must be developed as part of an interactive process involving both econometricians and decisionmakers.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2085.

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Date of creation: 31 Mar 1999
Date of revision:
Handle: RePEc:wbk:wbrwps:2085
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  1. Morris Goldstein & John Hawkins, 1998. "The Origin of the Asian Financial Turmoil," RBA Research Discussion Papers rdp9805, Reserve Bank of Australia.
  2. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  3. P. Honohan, 2000. "Banking System Failures in Developing and Transition Countries: Diagnosis and Prediction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(1), pages 83-109, 02.
  4. Guillermo A. Calvo, 1996. "Capital flows and macroeconomic management: tequila lessons," Working Papers in Applied Economic Theory 96-02, Federal Reserve Bank of San Francisco.
  5. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  6. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 5819, Inter-American Development Bank.
  7. Dooley, Michael P, 1996. "Capital Controls and Emerging Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 197-205, July.
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