Quantifying the Probability of a Banking Crisis and the Implications for Sovereign Risk

Adina-Ionela Străchinaru

doi:10.33422/ijarme.v3i4.506

Abstract

Identify and validate tools that anticipate the influence of macroeconomic indicators, whose history has indicated, at international level, episodes of economic collapse are the main objective of the paper. Using a logistic regression, I captured a model for quantifying the probability of banking crises, integrating indicators of the scoreboard on macroeconomic imbalances, as well as the sovereign risk premium for European countries. In this sense, the results show the premises underlying the elaboration of the analytical framework for the propagation of sovereign risk at the level of credit institutions.

Highlights

The banking crises of last years have signaled the need for early warning systems that would provide, in a timely manner, the vulnerabilities of the macro-financial system
Materials and Methods The research is based on two parts: macroeconomic indicators that define banking stability, proposed by the European Commission, based on which a score function is obtained, captured by a binary dummy variable and quantifying the impact of the banking crisis on sovereign risk, expressed with the help of the risk premium, respectively the CDS 5Y quotation
The aim of the study is to capture the dependence of banking stability on sovereign risk, in terms of indicators early warning

Summary

Introduction

The banking crises of last years have signaled the need for early warning systems that would provide, in a timely manner, the vulnerabilities of the macro-financial system. The financial sector generally has a positive impact on economic growth. The financial sector can create imbalances in the economy, becoming a source of systemic risk, with contagion effects in the supply of loans - significant impact on the real economy (population and NFI). Peculiarities of emerging economies (the case of Romania), such as inconsistencies in the mix of economic policies, the expansion of monetary substitution, labor migration, legislative uncertainty, deteriorating investor confidence, political uncertainty, the structure and cost of financing the current account deficit and of the budget deficit, the risk of non-repayment of non-government loans, contributes to the amplification of interaction between the banking sector, the public administration and the real economy channels. Bank solvency is declining and government liabilities are rising

Objectives

Methods

Results

Discussion

Conclusion