Fragile Banking System Research Articles

China's Financial Fragility and Policy Responses

This article discusses the problems facing China in the wake of the Asian financial crisis. Chinas has so far (September 1998) avoided devaluation of its currency, but growth has slowed down and much more economic reform is needed, especially of the fragile banking system. The article focuses on China's financial fragility and outlines the required policy measures.

Financial Markets and the Behavior of Private Savings in Latin America

This paper complements previous studies by arguing that the low private savings ratio in Latin America can be associated with the limited confidence of households and businesses in domestic financial institutions. Previous studies have established a relationship between private savings and financial markets either by using a measure of 'financial depth' or a measure of 'borrowing constraints.' This paper offers an alternative view by claiming that the private savings rate relates positively to the confidence of the private sector in the strength of the financial system and that the latter concept can be approximated by the ratio of corporate demand for bank liquid assets. Latin American countries have lower private savings rates than other developing and most industrial countries. They also display the highest corporate to household bank deposit ratios among the three groups of countries considered here. Further, the ratio of corporate to household deposit holdings is strongly correlated with other indicators of banking system fragility.

Determinants of Banking System Fragility: A Case Study of Mexico

This paper tests empirically the proposition that bank fragility is determined by bank-specific factors, macroeconomic conditions, and potential contagion effects. The methodology allows the variables that determine bank failure to differ from those that influence banks' time to failure (or survival rate). Based on the indicators of fragility of individual banks, we construct an index of fragility for the banking system. The framework is applied to the Mexican financial crisis that began in 1994. For Mexico, bank-specific variables and contagion effects explain the likelihood, whereas macroeconomic variables largely determine the timing, of bank failure.

Financial Liberalization Causes Banking System Fragility

This paper explores theoretically and empirically the link between Financial Liberalization (FL) and the banking crisis that often follow. We also investigate the proposition, classical in development economics, that FL should result in an increase in supply of funds to the real sector. To accomplish this we first develop a theoretical model of a banking firm that operates under financial repression and is then subject to FL. The model yields the result that following FL there is an unambiguous increase in risk to the banking firm which implies a higher probability of a banking crisis following FL. Less formally, we also conclude that the presence of a explicit or implict deposit insurance scheme is likely to accentuate the incentives to engage in risk and the risk structure of the banking system. Moral hazard plays an important role in this increase in risk to the banking sector. This questions the ''innocence'' of the bank owners in the crisis that have often followed FL and that had been attributed to either macroeconomic policy, concomitant structural changes in the economy or left-over distortions from the financial repression period. The sign of the change in supply of credit to the real sector, however, is ambiguous. Then we test empirically the propositions resulting from this model using data of 73 banks (some of which may have become technically insolvent) from Greece, Malaysia, Mexico, Taiwan and Thailand. The tests tend to support the conclusions of the theoretical model, i.e. unambiguous increase in risk and, for the sample used, an unambiguous fall in loan supply as a proportion of funds available. Finally we draw policy implication with respect to bank supervision, forbearance and bank failure resolution procedures during the transition period, and about the so-called ''liberalization sequencing.''

Banking System Fragility: Likelihood Versus Timing of Failure: An Application to the Mexican Financial Crisis

This paper tests empirically the proposition that bank fragility is determined by bank-specific factors, macroeconomic conditions and potential contagion effects. The methodology allows for the variables that determine bank failure to differ from those that influence banks’ time to failure (or survival rate). Based on the indicators of fragility of individual banks, we construct an index of fragility for the banking system. The framework is applied to the Mexican financial crisis beginning in 1994. In the case of Mexico, bank-specific variables as well as contagion effects explain the likelihood of bank failure, while macroeconomic variables largely determine the timing of failure.

Banking System Fragility: Likelihood Versus Timing of Failure: An Application to the Mexican Financial Crisis

This paper tests empirically the proposition that bank fragility is determined by bank-specific factors, macroeconomic conditions and potential contagion effects. The methodology allows for the variables that determine bank failure to differ from those that influence banks’ time to failure (or survival rate). Based on the indicators of fragility of individual banks, we construct an index of fragility for the banking system. The framework is applied to the Mexican financial crisis beginning in 1994. In the case of Mexico, bank-specific variables as well as contagion effects explain the likelihood of bank failure, while macroeconomic variables largely determine the timing of failure.