IMF Working Papers

Banking Sector Fragility and Systemic Sources of Fragility

Author/Editor:

Brenda Gonzalez-Hermosillo

Publication Date:

February 1, 1996

Summary:

A theoretical framework to assess the degree of fragility or, inversely, the soundness of the banking system is proposed. It is argued that, while a bank may be either solvent or insolvent at any given time, its degree of fragility must be a forward-looking measure based on the probability that it can withstand a destabilizing shock. Externalities are particularly important because they can constitute a serious source of systemic risk. The factors that determine banks’ soundness can be separated into bank-specific and those common to all banks (subject to microprudential and macroprudential considerations, respectively). The interconnection between banking crises and currency crises (in both directions) is also discussed.

Series:

Working Paper No. 1996/012

Subject:

Bank deposits Banking Banking crises Commercial banks Currency crises Distressed institutions Financial crises Financial institutions