Default, Credit Growth, and Asset Prices

Author/Editor:

C. A. E. Goodhart ; Miguel A. Segoviano ; Boris Hofmann

Publication Date:

September 1, 2006

Electronic Access:

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Disclaimer: 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

Summary:

This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy.

Series:

Working Paper No. 2006/223

Subject:

Asset prices Bank credit Banking Credit Economic and financial statistics Financial statistics Land prices Money Prices

English

Publication Date:

September 1, 2006

ISBN/ISSN:

9781451864830/1018-5941

Stock No:

WPIEA2006223

Pages:

43

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