Excessive Risk-Taking, Banking Sector Fragility, and Banking Crises

Abstract

In the financial crisis literature, it is usually argued that, contrary to the case of currency crises, construction of a time series index to identify banking crisis episodes is highly difficult, particularly because of the lack of reliable data on banking sector variables such as the level of non−performing loans. Accordingly, existing methods used to pinpoint banking crisis years are generally event−based, such as that used by Caprio and Klingebiel (1996 and 1999) and Lindgren et al. (1996). This paper, however, proposes a weighted banking sector fragility index to measure the changes in banks' vulnerability to crisis. Using monthly sectoral data for selected 22 countries, it is argued that this type of a fragility index seems to be highly useful in measurement and monitoring of banking sector fragility.

Implementing the Banking Sector Soundness Index (Bss) for Predicting Banking Crisis

“…Index Method developed by Kibritçioğlu (2002), who develop identification with the name of this crisis Banking Sector Fragility or BSF. BSF It has three main components of credit risk, liquidity risk and exchange rate risk.…”

Causality between banking and currency fragilities: A dynamic panel model

“…The first three are related to the asset side and the last one to the liability side. Kibritçioğlu (2002) constructs three banking sector fragility (BSF) indices based on both the asset and liability sides. Furthermore, his method helps us to trace the source of the banking fragility by removing each component in turn.…”

“…Kibritçioğlu (2002) thus proposes two alternative indices of banking fragility, BSF2 and BSF2⁎, where the former removes the changes in real bank deposits and the latter removes foreign liabilities. That is,…”

“…the explanatory variables are assumed to be uncorrelated with future realizations of the error term), 8 the generalized method of moment (GMM) estimators, suggested by Arellano and Bond (1991), is employed here. 9 7 Kibritçioğlu (2002) finds that Chile, Kenya, Mexico, Paraguay, Trinidad and Tobago and Venezuela exhibit a relatively high deposit and low foreign ratios. 8 That is, the past x does not affect the future error terms, which is similar to the concept that the past y does not affect future errors.…”

“…First, our focus is on the causality between banking and currency fragilities and not between their crises. Our banking sector fragility (BSF) is constructed based on Kibritçioğlu (2002)'s study. We do not consider the binary dummy of the banking fragility because the dummy variable may not exhibit enough variation to detect the possible causal relationship.…”