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From Financial Liberalization to Banking Failure: Starting on the Wrong Foot?

Listed author(s):
  • Klaus P. Fischer

    (Laval University)

  • Houcem Smaoui

    (Laval University)

In this paper we attempt to identify the characteristics of banks that are most likely to be at the origin of a banking crisis following a financial liberalization (FL) process. We do this analysis in response to the observed fact that FL processes arse often followed by banking crisis that cost taxpayers large amounts of resources in rescue operations. To accomplish this objective we identify a sample of ''failed'' and ''healthy'' banks following a FL and then compare their financial data at the onset of FL. We also attempt to identify to what extent the quality of the loan portfolio and the management and risk- taking practices of banks affect the outcome. The results are surprisingly robust and they mean that it may be possible to identify with an anticipation of at least 4 years the banks that could be responsible for an eventual banking crisis! Further, both quality of loans and management and risk-taking practices play a role. The results suggest that banks that are more conservative and thus those that are less likely to incur in moral hazard, or are more capable of absorbing important macro shocks given their capitalization, are the ones that are more likely to remain solvent. The study is based on a sample of 82 banks from Greece, Indonesia, Korea, Malaysia, Mexico, Thailand and Taiwan.

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Paper provided by EconWPA in its series Finance with number 9706005.

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Length: 22 pages
Date of creation: 18 Jun 1997
Handle: RePEc:wpa:wuwpfi:9706005
Note: Type of Document - Tex/; prepared on IBM PC - ; to print on HP/PostScript/; pages: 22 ; figures: included/. Comments are wellcome.
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  1. Klaus P. Fischer & Jean-Pierre Gueyie & Edgar Ortiz, 1997. "Financial Liberalization: Commercial Bank's Blessing or Curse?," Finance 9705003, EconWPA.
  2. 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.
  3. Park, Sangkyun, 1991. "Bank failure contagion in historical perspective," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 271-286, October.
  4. Martin, Daniel, 1977. "Early warning of bank failure : A logit regression approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 249-276, November.
  5. Sangkyun Park, 1991. "Bank failure contagion in historical perspective," Research Paper 9103, Federal Reserve Bank of New York.
  6. Coleen C. Pantalone & Marjorie B. Platt, 1987. "Predicting commercial bank failure since deregulation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 37-47.
  7. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-288, May.
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