The Changing Relationship between Banking Crises and Capital Inflows

Different types of capital inflows have varied effects when predicting banking crises in emerging and developing economies, and these relationships have meaningfully changed over time. In a sample of 29 developing and emerging economies over the period 1976–1991 increases in short‐term debt inflows raised the probability of a banking crisis while increases in inflows for long‐term borrowing by the private sector had the opposite effect. Conversely, over the period 1992–2007 increases in inflows for long‐term borrowing by the private sector and for equity investment both increased the probability of a banking crisis. The findings suggest distinct optimal capital account liberalization policies between the two periods.     

International Financial Contagion: Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transition economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulation and supervision are only slowly improving, and that stabilizing policies have slowly been eliminated. What insulated the CEECs from the recent wave of financial instability? To consider the counterfactual, we first provide a framework that links banking crises to financial deregulation. We then focus on a number of macro- and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's World Debt Tables, and from the BIS's Consolidated International Banking Statistics. We first compare past experiences in CEECs with those in other emerging economies as a cross-sectional reference point. We then consider whether the situation in CEECs has changed since the last banking sector problems, in order to establish a reference point across time. Our results indicate that the factors leading up to past banking crises are generally different in CEECs from those in other emerging economies. However, in recent years, the characteristics of CEECs have become more similar to those of other emerging economies.     

Sudden stops and the Mexican wave: Currency crises,capital flow reversals and output loss in emerging markets

Sudden stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows. We investigate whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output collapse (a “Mexican wave”). Using a panel data set over 1975–1997 and covering 24 emerging-market economies, we distinguish between the output effects of currency crises, capital inflow reversals, and sudden-stop crises. Sudden-stop crises have a large negative, but short-lived, impact on output growth over and above that found with currency crises. A currency crisis typically reduces output by about 2–3%, while a sudden stop reduces output by an additional 6–8% in the year of the crisis. The cumulative output loss of a sudden stop is even larger, around 13–15% over a 3-year period. Our model estimates correspond closely to the output dynamics of the ‘Mexican wave’ (such as seen in Mexico in 1995, Turkey in 1994 and elsewhere), and out-of-sample predictions of the model explain well the sudden (and seemingly unexpected) collapse in output associated with the 1997–1998 Asian Crisis.     

Sudden Stops and Currency Crashes

This paper investigates which factors determine whether sudden stops in international capital flows are followed by a currency crash using data for 85 economies in the period 1980–2012. An event study approach is used for an 11‐year window around the crises for nine potential explanatory variables. In addition, the paper estimates discrete‐choice panel models. The results suggest that low trade openness, shallow financial markets, and current account imbalances increase the likelihood that a sudden stop will be followed by a currency crash. Moreover, it is established that the impact of these factors differs across different exchange rate regimes.     

Financial reforms and capital flows to emerging Europe

Analysis of 18 emerging European economies finds domestic financial reforms to be positively associated with net capital inflows. Controlling for standard determinants of capital flows, we find banking sector reforms in particular to be consistent with higher net financial inflows, whereas no such correlation is found for security market reforms or for indicators of financial depth. Additional net inflows are reaped by the EU accession countries. Countries with more reformed banking sectors receive significantly higher FDI and “other” investment net inflows; this is also found for gross financial inflows, but not for gross outflows.     

External liabilities,domestic institutions and banking crises in developing economies

We investigate the impact of foreign equity and debt on the occurrence of banking crises in 61 lower income and middle income economies during the 1984 to 2010 period. We also focus on the effects of domestic institutions on banking crises and whether they mitigate or exacerbate the impact of the external liabilities. We find that FDI liabilities lower the probability of a crisis, while debt liabilities increase their incidence. However, institutions that lower financial or political risk partially offset the impact of debt liabilities, as does government stability. A decrease in investment risk directly reduces the incidence of banking crises.     

资本账户自由化、信贷扩张与系统性银行危机风险*

本文研究在资本账户自由化下，信贷扩张与资本流入对于系统性银行危机风险的影响。利用89个国家1973—2016年的长面板数据，并控制影响银行危机风险多项因素后，研究发现资本账户自由化有助于降低银行危机风险。进一步研究发现，FDI流入能显著降低银行危机风险；适量的股权投资流入有助于增强银行业稳定性；但当股权投资大量流入时，伴随着信贷过度扩张和资产泡沫，银行危机风险急剧增加；较低的债权投资流入对银行业稳定性无显著影响，但当超过一定规模时，银行危机风险显著增加。       

资本账户自由化、信贷扩张与系统性银行危机风险*

本文研究在资本账户自由化下，信贷扩张与资本流入对于系统性银行危机风险的影响。利用89个国家1973—2016年的长面板数据，并控制影响银行危机风险多项因素后，研究发现资本账户自由化有助于降低银行危机风险。进一步研究发现，FDI流入能显著降低银行危机风险；适量的股权投资流入有助于增强银行业稳定性；但当股权投资大量流入时，伴随着信贷过度扩张和资产泡沫，银行危机风险急剧增加；较低的债权投资流入对银行业稳定性无显著影响，但当超过一定规模时，银行危机风险显著增加。     

银行危机与货币危机共生性关系的实证研究

1 997— 1 998年的亚洲金融风暴中 ,银行危机与货币危机的同时爆发 ,即共生性危机的发生引发国际社会与学术界对这种现象的重新思考 :这种共生性现象是否确实具有普遍性 ?从理论的角度来看 ,银行危机与货币危机之间的确存在着一定的联系 ,但到目前为止 ,很少有研究从实证的角度来证明这种联系的确存在。正是基于此 ,本文从实证的角度出发 ,旨在揭示出银行危机与货币危机之间的确存在着相互影响 ,换言之 ,共生性危机的发生是具有显著性的。具体来说 ,本文以 1 975— 2 0 0 0年期间 53个国家危机的发生情况为研究对象 ,分别运用频率分布、信号法 ,以及概率回归模型来分析两种危机的共生性 ,并得到非常一致的结论 :在新兴市场国家中 ,银行危机与货币危机之间的确存在着明显的相互关系 ,同时银行危机更趋向于作为货币危机即将发生的同步或预警指标 ,而反之则不然。     

Early Warning for Currency Crises: What Is the Role of Financial Openness?

The paper explores whether financial openness—capital account openness and gross capital inflows—makes countries vulnerable to currency crises. A quarterly dataset on 46 advanced and emerging market economies (AEs and EMEs) during 1975Q1–2011Q4 is used, with the period after Q2 2007 used for out‐of‐sample testing. The key findings are: (1) capital account openness is associated with lower probability of currency crises, but less so for EMEs; (2) surges in gross capital flows are associated with increased risk of currency crises; and (3) the model performs well out‐of‐sample, confirming that early warning models are helpful in judging relative vulnerability.     

Capital account openness and early warning system for banking crises in G20 countries

This paper develops an early warning system for banking crises in the G20 countries, with the inclusion of capital account openness indicators. Results suggest that the capital account openness demonstrates a significant predictive power on systemic banking crises, and the impact is related with the level of the economic development. For low-income countries, increased capital account openness has a significantly negative impact on the banking crises likelihoods, while for high-income countries it imposes a positive impact. For middle-income countries, however, the occurrence of banking crises is more indifferent to capital account liberalization.     

Optimal versus adequate level of international reserves: evidence for Turkey

The determination of international reserve balance for emerging economies is part of the efforts to strengthen the immunity of these economies to crises. However, there is still evidence on crises even for the countries with large foreign reserves. It has usually been experienced that the countries with greatest need for reserves economize more than others on their holdings since they might underestimate the cost of crisis. In this study, the official international reserves of Turkey are tested against optimality and adequacy. During 1988–2002, the actual reserves fell short of both the optimal and the adequate levels. They are only optimal when the expected cumulative contraction is about 5.2% of real GDP under crisis. However, early evidence from emerging economies and Turkey show that crises hit more heavily. Hence, it is found that the current financial structure in Turkey such as the absence of capital controls and a highly dollarized banking system necessitates more foreign reserves for preventing any future economic and/or financial shocks.     

Real effects of banking crises: Imports of capital goods by developing countries

We examine the hypothesis that banking crises have real effects on developing economies by reducing imports of capital goods. We test this hypothesis by estimating a model for the determinants of imports of capital goods by a panel of developing economies during 1961 to 2010. Our results suggest that not only do banking crises have statistically significant and economically important effects on imports of capital goods, but these effects increase the longer a banking crisis lasts. Imports of capital goods are a critical component of the capital stock and the production process in developing economies and, thus, our results highlight one important channel through which banking crises may hamper the growth prospects of these economies.     

Effects of capital flow on the equity and housing markets in Hong Kong

The revival of strong capital flows to emerging economies following the global financial crisis in 2008–2009 has rekindled the debate on effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross‐border fund movements. It is found that the official and illicit capital flow measures display a low level of comovement and exhibit differential effects on Hong Kong's equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of sector‐specific capital management policies.     

产出不确定,信息不对称与双重危机发生机制

本文构造了一个具有银行部门和消费—生产者微观基础的一般均衡模型,分析了新兴市场国家双重危机的发生机制。本文发现,下列条件可以引发双重金融危机:(1)一部分外国存款人在中期获得了关于东道国未来产出或币值的糟糕信号;(2)本国居民对未来产出或币值的不利信号反应过度而不再追加投资;(3)居民由于"动物情绪"不再追加投资。     

Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.     

Financial development and openness: Evidence from panel data

This paper addresses the empirical question of whether trade and financial openness can help explain the recent pace in financial development, as well as its variation across countries in recent years. Utilising annual data from developing and industrialised countries and dynamic panel estimation techniques, we provide evidence which suggests that both types of openness are statistically significant determinants of banking sector development. Our findings reveal that the marginal effects of trade (financial) openness are negatively related to the degree of financial (trade) openness, indicating that relatively closed economies stand to benefit most from opening up their trade and/or capital accounts. Although these economies may be able to accomplish more by taking steps to open both their trade and capital accounts, opening up one without the other could still generate gains in terms of banking sector development. Thus, our findings provide only partial support to the well known Rajan and Zingales hypothesis, which stipulates that both types of openness are necessary for financial development to take place.     

The effect of financial liberalization on banking sector stability

Several studies indicate that financial liberalization increases likelihood of a financial crisis without distinguishing between a normal period, unstable period preceding the onset of banking panics and crisis/post period. We explain in this paper the relationship between financial liberalization and banking sector vulnerability. Then, we argue that banking sector turmoil is most likely to occur after an intermediate degree of liberalization. Using a recently updated dataset for financial reforms, we find an inverted U-shaped relationship between liberalization and the likelihood of banking crisis for a sample of 49 countries between 1980 and 2010. We used a multinomial logit model in order to take into account what is called the ‘post crisis bias’. We ask whether the relationship remains when institutional characteristics of countries and dynamic effects of liberalization are considered. The empirical results indicate that the relationship between liberalization and banking sector stability depends strongly on the strength of capital regulation and supervision. With very weak regulation and supervision, the probability of banking crises is increasing with liberalization but this relationship is reversed as regulation and supervision become significant. The most important type of liberalization in relation to banking crises seems to be operational. A policy implication is that positive growth effects of liberalization can be achieved without increasing the risk of a banking fragility if appropriate institutions are developed.     

Global banking,global crises? The role of the bank balance-sheet channel for the transmission of financial crises

We examine whether shocks to leveraged creditors with cross border holdings have an incidence on debtor countries׳ risk of suffering financial turmoil. We construct a new proxy of shocks to international banks׳ balance-sheets using credit ratings and the structure of their international assets. This allows us investigating the effect of (foreign) bank balance-sheet shocks on domestic financial turmoil in a large sample of 146 developed and emerging economies from 1984 to 2011. Our proxies of shocks towards bank balance-sheets are strong predictors of systemic banking crises in their debtor countries. Confirming these results, bilateral bank flows significantly decrease when creditor banks׳ assets are hit by negative shocks, as measured by credit rating downgrades from third-party countries. Short-term liabilities towards global banks appear to increase roll-over and funding risks, thereby amplifying the impact of shocks to foreign lenders’ balance-sheets. Domestic banking sectors vulnerabilities, such as illiquid assets and a low deposit-asset ratio, are found to increase crisis contagion risk. In contrast, a high level of global liquidity attenuates the transmission of shocks to international banks׳ assets to debtor countries.