Financial liberalization,disaggregated capital flows and banking crisis: Evidence from developing countries

The aim of this paper is to examine whether financial liberalization has triggered banking crises in some developing countries. We focus in particular on the role of capital flows as their volatilities threat economic stability and growth. In the empirical model, based on panel logit estimation, we use the two common financial liberalization indicators (defacto and dejure) for a panel of 58 developing countries observed during the period 1984–2007. Unlike the previous studies, this paper reveals that both indicators of financial liberalization did not trigger banking crises. However, the results show that foreign debt liabilities to total liabilities and foreign direct investment liabilities to total liabilities increase the likelihood of banking crises.     

What is really common in the run-up to banking crises?

Arguing that crises are similar if they are predictable from historical experience, we employ panel logit models to examine similarities in the run-ups to the current global financial crisis and historical banking crises. Asset bubbles are the most common precursors.     

Sudden stops, banking crises and investment collapses in emerging markets

We evaluate whether financial openness leaves emerging market economies vulnerable to the adverse effects of capital reversals (“sudden stops”) on domestic investment. We investigate this claim in a broad sample of emerging markets during the period 1976–2002. If the banking sector does not experience a systemic crisis, sudden stop events fail to have a significant impact on investment. Bank crises, on the other hand, have a significant negative effect on investment even in the absence of a contemporaneous sudden stop crisis. We also find that openness to capital flows worsens the adverse impact of banking crises on investment. Our results provide statistical support for the policy view that a strong banking sector which can withstand the negative fallout of capital flight is essential for countries that open their economies to international financial flows.     

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.     

Crises and exchange rate regimes: time to break down the bipolar view?

We revisit the link between crises and exchange rate regimes (ERR). Using a wide panel of 90 developed and developing countries over the period 1980–2009, we find that corner ERR are not more prone to crises compared to intermediate ERR. This finding holds for different types of crises (banking, currency and debt), and is robust to a wide set of alternative specifications. Consequently, we clearly break down the traditional bipolar view: countries that aim at preventing crisis episodes should focus less on the choice of the ERR, and instead implement sound structural macroeconomic policies.     

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。     

The Causes and Consequences of the Misdiagnosis of the Financial Crisis in the United States

Using an analytical framework that divides banking crises into ‘classic’ and ‘secondary’ crises, this article analyzes the banking crisis that broke out in the United States in the summer of 2007 and the response of US authorities. While quite simple in itself, this framework allows for a novel interpretation of the unfolding of the crisis and for evaluating US authorities in the design and implementation of crisis resolution mechanisms. As suggested by the title, the principal hypothesis of the article is that the crisis was fundamentally misdiagnosed, leading to a flawed bailout that all but guarantees its inefficacy in bringing the US financial system back to health at a reasonable fiscal cost.     

The fiscal impact of high-skilled emigration: Flows of Indians to the U.S.

What are the fiscal consequences of high-skilled emigration for source countries? This paper develops methodologies for inferring these consequences and applies them to the recent sizable emigration of high-skilled workers from India to the U.S. This wave of emigration from India to the U.S. is shown to be unusually concentrated amongst the prime-age work force, the highly educated and high earners. In order to calculate the fiscal losses associated with these emigrants, estimates of their counterfactual earnings distributions are generated using two distinct methods and integrated with a model of the Indian fiscal system to calculate fiscal consequences. Conservative estimates indicate that the annual net fiscal impact to India of high-skilled emigration to the U.S. is one-half of 1% of gross national income (or 2.5% of total fiscal revenues). The sensitivity of these results to the method of predicting counterfactual incomes and the implications of these estimates for other developing countries is discussed in detail.     

Credit information sharing and banking crises: An empirical investigation

We study the effect of credit information sharing on the likelihood of banking crises using a comprehensive cross-country dataset for the period from 1975 to 2006. The empirical analysis shows that credit information sharing reduces the likelihood of banking crises and it does more so in low income countries. The effect is statistically and economically significant, and applies to both public registries and private bureaus. Furthermore, we show that credit information sharing reduces the impact of rapid credit growth on banking crises. Specifically, rapid credit growth is less likely to lead to a banking crisis in countries with credit information sharing.     

Growth with endogenous migration hump and the multiple,dynamically interacting effects of aid in poor developing countries

We show empirically that aid given to poor developing countries enhances growth and reduces emigration, once several dynamically interacting effects of aid are taken into account in a system of equations. We estimate equations for net immigration flows as a share of the labour force and Gross Domestic Product Per Capita (GDPPC) growth and also for all their regressors including remittances and official development aid. We use dynamic panel data methods for a sample of poor countries with GDPPC below $1200 (2000), for which aid is about 9.5% of GDP. The partial effects in these regressions are working against each other. Therefore, we integrate all equations into a dynamic system and run a simulation. One result is an endogenous migration hump with several peaks. In a counterfactual simulation, we double aid with the consequence that for more than a 100 years migration is reduced and the GDPPC is enhanced, because the positive effects of aid on investment and education dominate the negative direct effects of aid on growth and the unfavourable effects on savings, tax revenues and labour force growth.     

Liquidity and Twin Crises

This paper proposes a simple analytical framework for understanding 'twin crises'– i.e. crises where a currency crisis and banking crisis occur simultaneously and reinforce each other. The distinguishing feature of such crises is the spill‐over effects across financial institutions through collateral constraints, declines in market values of assets, currency mismatches on the balance sheet and the endogenous amplification of financial distress through asset sales. We explore the role of liquidity and the role of monetary policy in such crises. In particular, a central question is whether raising interest rates in the face of a twin crisis is the appropriate policy response. Raising interest rates has two countervailing effects. Holding the domestic currency becomes more attractive (other things being equal), but the value of the domestic banking system falls due to the fall in asset prices. When assets are marked to market, there is a potential for endogenously generated financial distress that leads to a collapse of asset prices, as well as the exchange rate. It is thus possible that raising interest rates can have the perverse effect of exacerbating both the currency crisis and the banking crisis.     

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.     

Fiscal transparency,government effectiveness and government spending efficiency: Some international evidence based on panel data approach

The global financial crisis and the debt crisis of the EU countries revealed serious weaknesses in fiscal reporting. As a consequence, uncertainties regarding the real situation of the public accounts of the countries raised doubts in relation to the effectiveness of government policies. Since then, countries are undertaking reforms in order to improve fiscal transparency. This paper analyzes whether countries are making efforts to enhance fiscal transparency, and whether fiscal transparency affects government effectiveness and government spending efficiency. We consider two channels through which this effect occurs. The first channel is indirect and it works through public debt. The second channel is the direct effect that transparency has on government effectiveness and government spending efficiency once transparency enhances accountability and thus the task of resource allocation. We use a sample of 82 countries (68 developing and 14 developed) for the period 2006–2014, and panel data analysis. Comparing the scores of fiscal transparency between 2006 and 2014, we observe that approximately 80 per cent of the countries made efforts to improve fiscal transparency. The results suggest fiscal transparency is important to reduce public debt and to improve government effectiveness and government spending efficiency.     

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.     

Liberalization,Regulatory Delays and Vulnerability to Systemic Banking Crisis

This work aims at contributing to the improvement of the early warning systems of banking crises using a new approach accounting for model uncertainty. We show that a multinomial logit model based on Bayesian model averaging (BMA) is a good strategy to predict banking crisis. To do this, we argue that differences in vulnerability to banking crisis can be largely explained by an asymmetry between financial market evolution and regulation update on a sample of 49 developed and developing countries between 1980 and 2010. When markets are liberalized, competition pushes bankers to take more risks and take advantage of regulatory delays thus increasing crises probabilities. Our empirical evidence supports that crisis probability is higher in country liberalizing their banking system when regulation is not updated. We developed an early warning system for systemic banking crises based on the multinomial logit model. Its main difference to existing prediction models and its contribution to the literature is that it is intended to identify and resolve what is called by Bussiere and Fratzscher [(2006). Towards a new early warning system of financial crises. Journal of International Money and Finance, 25(6), 953–973] as post-crisis bias in binomial models and to develop a new methodology of leading indicators selection based on BMA. Overall, our model predicts all banking crises during our sample period.     

THE GREAT RECESSION, “RAINY DAY” FUNDS,AND COUNTERCYCLICAL FISCAL POLICY IN LATIN AMERICA

We examine the fiscal policy options that were available to Latin American countries at the onset of the current global economic crisis, concluding that most of the major countries in the region possessed the fiscal space (as measured by credible fiscal sustainability and debt headroom) to run prudent countercyclical fiscal deficits. For those countries, the appropriate policy response involved a constrained fiscal expansion focused on productive public spending and financed by drawing on the “rainy day” funds—in the form of large stocks of foreign exchange reserves—that they accumulated in prior years, rather than by market borrowing. (JEL E62, E63, F34)     

The determinants of cross‐border bank flows to emerging markets

This paper studies the determinants of cross‐border bank lending on a panel dataset comprising 17 advanced and 28 emerging market economies from 1993 to 2008. The empirical framework is based on a gravity model of financial flows. Our main findings are that the decrease in cross‐border lending in the 2007–2008 crisis was mostly due to global rather than country‐specific risk factors, and that central and eastern Europe was less affected by this decrease than other emerging market regions because of its stronger financial and monetary ties with creditor countries, and its relatively sound banking systems. These results are fairly robust to several different specifications, sub‐samples and econometric methodologies.     

Fiscal consolidation and financial reforms

We use a rare events logistic regression model as well as traditional probit and logit models to investigate the impact of fiscal consolidation on the likelihood of financial reforms for a panel of 17 countries over the period 1980–2005. We show that large austerity plans, mainly implemented through spending cuts rather than tax hikes, promote financial reforms. By considering reforms affecting specific areas of the financial sector, we find that the banking sector reforms and domestic finance reforms are more likely to occur when fiscal adjustments are put in place. Interestingly, while banking sector reforms are mainly prompted during periods of tax-driven consolidations, spending cuts driven consolidation packages seem to propel the implementation of domestic finance reforms. Finally, we show that higher inflation, lower degree of trade openness, a deterioration of financial conditions and, to some extent, a fall in the degree of competitiveness enhance the probability of financial reforms.     

European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU programs (financial and fiscal rules as well as financial support in crisis countries), and (c) domestic austerity programs. We measure immediate market impact effects: what policies changed risk perceptions, using CDS spreads on sovereign bonds and banks in this assessment. We employ dynamic panel and event study methodologies in the empirical work. We find that a number of programs initially stabilized sovereign and bank bond markets (e.g. Outright Monetary Transactions program), although announcement and implementation impacts on markets differed in some cases (e.g. second Covered Market Bond Program). Actions designed to shore up sovereign markets often lowered risk assessments in bank bond markets and policies designed to ensure safety and soundness of the European banking system in some cases significantly impacted sovereign debt markets. Finally, a number of policies designed to stabilize markets had surprisingly little immediate impact on either sovereign or bank bond market risk assessments.