Banking Crises and Crisis Dating: Theory and Evidence
IMF Working Papers, July 1, 2009
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Bibliographic details
- Authors: Elena Loukoianova, Gianni De Nicolo, John H. Boyd
- Published: July 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872880.001
Summary and research question
- Many empirical studies of banking crises have employed "banking crisis" (BC) indicators constructed using primarily information on government actions undertaken in response to bank distress.
- The authors formulate a simple theoretical model of a banking industry to identify and construct theory-based measures of systemic bank shocks (SBS).
- Core research question: Do BC indicators measure the occurrence of systemic bank shocks or do they measure lagged government responses to those shocks?
Methodology
- Development of a simple theoretical model of a banking industry to derive measures of systemic bank shocks (SBS).
- Empirical analysis using both country-level and firm-level samples to test the predictive relationship between SBS indicators and existing BC indicators.
- Comparison against four major BC series that have appeared in the literature.
Key findings
- SBS indicators consistently predict BC indicators based on four major BC series that have appeared in the literature.
- Therefore, BC indicators actually measure lagged government responses to systemic bank shocks, rather than the occurrence of crises per se.
- The impact of macroeconomic factors, bank market structure, deposit insurance, and external shocks on:
- the probability of a systemic bank shock, and
- the probability of government responses to bank distress
is "totally different" between the two probabilities.
- Disentangling the effects of systemic bank shocks and government responses is crucial in understanding the roots of bank fragility.
- Many findings of a large empirical literature need to be re-assessed and/or re-interpreted given the distinction between SBS and BC indicators.
Implications for empirical research and interpretation
- Empirical studies that use BC indicators as proxies for banking crises should recognize that these indicators primarily capture government responses to distress and not necessarily the timing or occurrence of systemic shocks.
- Re-assessment and possible re-interpretation are required for a large body of existing empirical literature on banking crises.