Macro Financial Determinants of the Great Financial Crisis: Implications for Financial Regulation

Abstract

By analysing the macro financial determinants of the Great Financial Crisis of 2007-2009 on 83 countries, we find that the probability of suffering the crisis in 2008 was larger for countries having higher levels of credit deposit ratio whereas it was lower for countries having higher levels of: i) net interest margin, ii) concentration in the banking sector, iii) restrictions to bank activities, iv) private monitoring. Our findings contribute to the ongoing discussion that can help policymakers calibrate new regulation, by achieving a reasonable trade-off between financial stability and economic growth.JEL Classification: G15; G18; G21

The determinants of vulnerability to the global financial crisis 2008 to 2009: Credit growth and other sources of risk

“…This implies that a 1% increase in pre-crisis growth in borrowing translates into an additional loss in cumulative real output of 0.2% on average. The role of credit growth plays in the global financial crisis is well documented (Berkmen et al, 2009;Lane and Milesi-Ferretti, 2010;Cecchetti et al, 2011;Caprio et al, 2010), but we find further support for a measure of the country's risk of contagion via external funding. In particular, the interaction with claims of advanced economies on the domestic economy appear to exacerbate the effects of the crisis.…”

“…Against the backdrop of the crisis origin, with private debt exceeding private income by a great margin (Mian and Sufi, 2011), it comes as no surprise that leverage and credit can have firm repercussions on the real economy (Mian and Sufi, 2009). This finding has been corroborated on a global scale using different country samples, estimation techniques as well as measures of crisis severity (Berkmen et al, 2009;Lane and Milesi-Ferretti, 2010;Cecchetti et al, 2011;Caprio et al, 2010;Giannone et al, 2011).…”

The Architecture and Governance of Financial Supervision: Sources and Implications

“…A related study by Caprio et al () examines the determinants of the likelihood of suffering a financial crisis in 2007–09 using data for 83 countries. Their key dependent variable is whether a country's bank supervisors have the authority to take specific action.…”

How did the financial crisis alter the correlations of U.S. yield spreads?

“…The 3-month LIBOR{OIS spread was potentially lowered by the range of swap arrangements among central banks. 10 In May 2008, the Wall Street Journal published an article asserting that several global banks were reporting LIBOR quotes signi cantly lower than those implied by prevailing credit default swap (CDS) spreads. Some concerns have been raised that after the so-called LIBOR scandal erupted in 2008, the use of the LIBOR rate for academic research may require caution.…”

“…A persistent state of turmoil engulfed the international nancial markets { particularly U.S. equity, debt, credit, and derivatives markets { between the summer of 2007 and the late spring of 2009. A number of papers (e.g., Caprio et al, 2010;Gal , 2010) have labeled such a state, characterized by unsettled and dysfunctional markets, as the \Great Financial Crisis." There is now little doubt that the Great Financial Crisis ravaged U.S. xed income (debt and credit) markets in unprecedented ways (see Dwyer and Tkac, 2009).…”