The market’s view on the probability of banking sector failure: cross-country comparisons

Hall and Miles (1990) suggest an approach of estimating default probabilities of banks using stock market information, and in this paper we apply an aggregated version of their approach to banking sectors around the world in both developed and emerging economies. We study the market’s assessment of the probability of systemic banking crises world wide over the last decade, including the Asian crisis 1997–1998. In addition, we investigate whether there is a relationship between the failure probability and institutional features of the actual banking sector. The quality of governance and the degree of law and order in a country is found to be significantly negatively related to the market based failure probabilities as is an explicit deposit insurance during periods of crisis.