Commodity Price Movements and Banking Crises

Abstract

We develop an empirical model to predict banking crises in a sample of 60 low-incomecountries (LICs) over the 1981-2015 period. Given the recent emergence of financial sectorstress associated with low commodity prices in several LICs, we assign price movements inprimary commodities a key role in our model. Accounting for changes in commodity pricessignificantly increases the predictive power of the model. The commodity price effect iseconomically substantial and robust to the inclusion of a wide array of potential drivers ofbanking crises. We confirm that net capital inflows increase the likelihood of a crisis;however, in contrast to recent findings for advanced and emerging economies, credit growthand capital flow surges play no significant role in predicting banking crises in LICs.