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Does the risk on banks’ balance sheets predict banking crises? New evidence for developing countries

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  • de Haan, Jakob
  • Fang, Yi
  • Jing, Zhongbo

Abstract

Simulation results of our theoretical model for banks’ risk-taking behavior suggest that during booms banks have high non-core liabilities, high leverage and few liquid assets, while the reverse holds during busts. We investigate the predictive power of these bank balance sheet variables for future banking crises using monthly data of 147 developing countries for the period 1980–2016. Our results suggest that low levels of liquid assets and domestic financial liabilities, high levels of foreign liabilities and high financial leverage increase are leading indicators of banking crises. Results are robust when we use different (lags of) dependent variables and control variables.

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  • de Haan, Jakob & Fang, Yi & Jing, Zhongbo, 2020. "Does the risk on banks’ balance sheets predict banking crises? New evidence for developing countries," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 254-268.
    • Handle: RePEc:eee:reveco:v:68:y:2020:i:c:p:254-268
    DOI: 10.1016/j.iref.2020.03.013
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    2. He, Wenjia & He, Wenjing & Xu, Dandan & Yue, Pengpeng, 2023. "Economic volatility, banks’ risk accumulation and systemic risk," Finance Research Letters, Elsevier, vol. 57(C).
    3. Citterio, Alberto, 2024. "Bank failure prediction models: Review and outlook," Socio-Economic Planning Sciences, Elsevier, vol. 92(C).
    4. Maximilian Grimm, 2024. "The Effect of Monetary Policy on Systemic Bank Funding Stability," ECONtribute Discussion Papers Series 341, University of Bonn and University of Cologne, Germany.
    5. KurmaÅŸ AkdoÄŸan & Neslihan Kaya EkÅŸi & Ozan EkÅŸi, 2021. "Determinants of Non-Core Liabilities of Banks in Emerging Markets in the Post-Crisis Era," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 35(1), pages 68-86.
    6. Li Xian Liu & Shuangzhe Liu & Milind Sathye, 2021. "Predicting Bank Failures: A Synthesis of Literature and Directions for Future Research," JRFM, MDPI, vol. 14(10), pages 1-24, October.
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    More about this item

    Keywords

    Banking fragility; Balance sheet pro-cyclicality; Early warning models;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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