Credit booms, banking crises, and the current account

Abstract

A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.

Historical Patterns of Inequality and Productivity around Financial Crises

“…Previous research has mainly focused on changes of "financial" factors in explaining the occurrence of financial crises in the near future, such as movements in credit (e.g., Mueller, 2017), aggregate stock and house prices (e.g., Anundsen et al, 2016), and external deficits (e.g., Davis et al, 2016). 3,4 Substantial evidence suggests that bank credit expansions play a particular role with respect to financial crises.…”

Sustainability of merchandise trade flows between Croatia and other EU member states: Panel cointegration approach

“…Robert Unger (2017) employed panel error-correction specification and showed that flows of bank loans to the non-financial private sector are a significant determinant of the current account and that they -together with changes in competitiveness -constituted the most important factor driving the build-up of current account imbalances in the deficit countries. J. Scott Davis et al (2016) examined the cause of a crisis and found that the combination of credit growth and external deficits increases the probability of a banking crisis. M. Fatih Ekinci, F. Pinar Erdem, and Zubeyir Kilinc (2015) pointed that, at the early stages of financial development, acceleration in credit growth might cause a larger deterioration in the current account balance.…”

Optimal Bailouts in Banking and Sovereign Crises

“…This dataset covers the years 1970-2017. The sample contains 21 advanced and 17 emerging market economies as in Davis et al (2016). The unconditional default frequency is calculated as the total count of default events divided by the total number of country-year pairs.…”

“…In the data, we follow the classification inLaeven and Valencia (2013), who use banking sector losses and other indicators to identify banking crises. The list of 38 advanced and emerging economies is as inDavis et al (2016). In the model, we define a banking crisis as a non-zero reduction of bank's capital.…”