Abstract
Systemic Banking crises are a recurrent phenomenon that affects society, and there is a need for a better understanding of the risk factors to support prudential regulation and reduce unnecessary risk intake in the financial system. This paper examines the main bank risk determinants in Latin America. The period analysed covers the timespan from 1999 to 2013, including the systemic banking crisis episodes in Argentina (2001-2003) and Uruguay (2002-2005). We apply a new data-driven comparable methodology to classify and select commercial banks from the sample. We study bank risk proxied by the Z-score. In the analysis, we apply bank specific, macroeconomic and regulatory variables. We use the system-GMM estimator as our main empirical analysis method. Our results show negative relationships between the profitability and the liquidity of a bank and its risk and a positive relationship between bank asset quality and its risk. However, we find a negative correlation between good management and bank risk. We perform several robustness tests by applying alternative methodologies, and the results are similar to those our original model.
Highlights
Banking crises and banking regulation are recurrent topics in the economic policy debate
Liquidity is related to the fundamental maturity transformation mission of a bank, which consists of transforming deposits and other liabilities into loans
During the recent financial crisis of 2008, when the European Central Bank (ECB) cut interest rates to below zero—making it expensive for banks to have deposits at the central bank—banks allocated the liquidity to assets, which increased the home-bias risk
Summary
Banking crises and banking regulation are recurrent topics in the economic policy debate. Prudential regulation aims to reduce excessive bank risk-taking and capital shortages in an attempt to protect society (Kane 2016) These controls tend to arrive too late, after a crisis is already spreading. Agnoli and Vilán (2008) show that banking systems in Latin America have higher concentrations and market power than European and Asian banking systems Another key issue is the way banking crises are managed; Laeven and Valencia (2012) showed that banking crises in developed countries tend to apply macroeconomic policies, while the bank restructuring approach is more popular in developing countries.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
