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

Author

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  • Demirguc-Kunt, Asli
  • Detragiache, Enrica

Abstract

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.

Suggested Citation

  • Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Monitoring banking sector fragility : a multivariate logit approach with an application to the 1996-97 banking crises," Policy Research Working Paper Series 2085, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2085
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    References listed on IDEAS

    as
    1. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
    2. repec:idb:wpaper:318 is not listed on IDEAS
    3. 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.
    4. Morris Goldstein & John Hawkins, 1998. "The Origin of the Asian Financial Turmoil," RBA Research Discussion Papers rdp9805, Reserve Bank of Australia.
    5. 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.
    6. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 6067, Inter-American Development Bank.
    7. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
    8. 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, February.
    9. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-223, July.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Tobias Knedlik & Gregor Von Schweinitz, 2012. "Macroeconomic Imbalances as Indicators for Debt Crises in Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 50(5), pages 726-745, September.
    2. Andrea Amaral & Margarida Abreu & Victor Mendes, 2010. "Contagion in Banking Crises: A Spatial Probit Model," Working Papers Department of Economics 2010/03, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. repec:ibn:ibrjnl:v:11:y:2018:i:2:p:231-245 is not listed on IDEAS
    4. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.
    5. Campbell, Gareth & Coyle, Christopher & Turner, John D., 2016. "This time is different: Causes and consequences of British banking instability over the long run," Journal of Financial Stability, Elsevier, vol. 27(C), pages 74-94.
    6. Anginer, Deniz & Cerutti, Eugenio & Martínez Pería, María Soledad, 2017. "Foreign bank subsidiaries' default risk during the global crisis: What factors help insulate affiliates from their parents?," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 19-31.
    7. repec:ibn:ibrjnl:v:11:y:2018:i:2:p:222-230 is not listed on IDEAS
    8. Sahut, Jean-Michel & Mili, Mehdi, 2011. "Banking distress in MENA countries and the role of mergers as a strategic policy to resolve distress," Economic Modelling, Elsevier, vol. 28(1), pages 138-146.
    9. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.

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