The Anatomy of Banking Crises

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.

Could Early Warning Systems Have Helped To Predict the Sub-Prime Crisis?

“…We give a brief outline of the methodology here; a fuller explanation can be found in Breimen at al (1984) and Steinberg and Colla (1995) and economic applications can be found in Duttagupta and Cashin (2008) who examined banking crises, Manasse et al (2003) who examined sovereign debt crises and Ghosh and Ghosh (2002) who examined currency crises.…”

“…One is the "traditional" multivariate logit method and the other is the binary recursive tree (BRT) technique. The latter approach is a new tool for banking crisis prediction, which has previously been applied to systemic banking crises only by Duttagupta and Cashin (2008).…”

Bank regulation, property prices and early warning systems for banking crises in OECD countries

“…There is a large literature on systemic banking crisis prediction via so called early warning systems (EWSs) which utilise a range of estimators from panel logit (as in Demirguc-Kunt andDetragiache 2005, Davis andKarim 2008a) to signal extraction (Kaminsky and Reinhart 1999, Borio and Lowe 2002, Borio and Drehmann 2009) to binary recursive trees (Duttagupta and Cashin 2008, Karim 2008, Davis and Karim 2008b.…”

Towards a New Model for Early Warning Signals for Systemic Financial Fragility and Near Crises: An Application to OECD Countries

“…This approach has been used in a limited number of studies including and Duttagupta and Cashin (2008) for banking crises, Ghosh and Ghosh (2002) for currency crises and Manasse and Roubini (2005) and Manasse et al (2003) for sovereign debt crises. Duttagupta and Cashin (2008) A similar analysis for US banks, but of network structure nature rather than a binary mode, on a much more limited sample and for a short time horizon, was developed by Jagtiani, Kolari, Lemieux and Shin (2003) in the form of a non-parametric Trait-Recognition-Analysis (TRA). The analysis is closely associated with neural network models used in science for the prediction of earthquakes and oil exploration, and seeks to exploit information contained in complex interactions of the independent variable set.…”