The Anatomy of Banking Crises
IMF Working Papers, April 1, 2008
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- The Anatomy of Banking Crises
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Bibliographic details
- Authors: Rupa Duttagupta, Paul Cashin
- Published: April 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869545.001
Methodology
- Model: Binary Classification Tree (BCT) model.
- Sample: 50 emerging market and developing countries during 1990-2005.
- Purpose: Identify key indicators and their threshold values at which vulnerability to banking crisis increases.
Key findings
- The BCT identifies three crisis-prone conditions:
- (i) very high inflation.
- (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity.
- (iii) low bank profitability.
- Interpretation: 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.
Robustness and validation
- Results remain valid under alternative robustness checks (no numerical alterations provided in the source text).
Policy implications and monitoring
- Monitoring frameworks should track:
- inflation levels, including episodes of very high inflation;
- liability dollarization measures (highly dollarized bank deposits) together with exchange rate pressures (nominal depreciation) and liquidity indicators;
- bank profitability metrics to detect low profitability regimes.
- Use of BCT-based indicator thresholds can strengthen early-warning systems for banking system vulnerabilities.