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A Leading Indicator Model of Banking Distress ¡V Developing an Early Warning System for Hong Kong and Other EMEAP Economies

Author

Listed:
  • Jim Wong

    (Research Department, Hong Kong Monetary Authority)

  • Eric Wong

    (Research Department, Hong Kong Monetary Authority)

  • Phyllis Leung

    (Research Department, Hong Kong Monetary Authority)

Abstract

This study develops a probit econometric model to identify a set of leading indicators of banking distress and estimate banking distress probability for Hong Kong and other EMEAP economies. Macroeconomic fundamentals, currency crisis vulnerability, credit risk of banks and companies, asset price bubbles, credit growth, and the occurrence of distress of other economies in the region are found to be important leading indicators of banking distress in the home economy. The predictive power of the model is reasonably good. A case study of Hong Kong based on the latest estimate of banking distress probability and stress testing results shows that currently the banking sector in Hong Kong is healthy and should be able to withstand well certain possible adverse shocks. Under some extreme shocks originating from real GDP growth and property prices such as those that occurred during the Asian financial crisis, the model indicates a non-negligible risk of an occurrence of banking distress in Hong Kong. However, the chances of the occurrence of such severe events are extremely low. Simulation results also suggest that compared to the period before the Asian financial crisis, the local banking sector is currently more capable of withstanding shocks similar to those that occurred during that crisis. The study also finds that banking distress is contagious, suggesting that to be effective in monitoring banking distress, close cooperation between central banks should be in place.

Suggested Citation

  • Jim Wong & Eric Wong & Phyllis Leung, 2007. "A Leading Indicator Model of Banking Distress ¡V Developing an Early Warning System for Hong Kong and Other EMEAP Economies," Working Papers 0722, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0722
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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_22_full.pdf
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    Citations

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    Cited by:

    1. Iustina Boitan, 2012. "Development of an Early Warning System for Evaluating the Credit Portfolio's Quality. A Case Study on Romania," Prague Economic Papers, Prague University of Economics and Business, vol. 2012(3), pages 347-362.
    2. Casu, Barbara & Clare, Andrew & Saleh, Nashwa, 2011. "Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries," MPRA Paper 37043, University Library of Munich, Germany.
    3. Fernández Sainz, Ana Isabel & Llaugel, Felipe, 2011. "¿Bancos con Problemas? Un Sistema de Alerta Temprana para la Prevención de Crisis Bancarias," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
    4. Bogdan Florin FILIP, 2014. "Monetary Tensions And Factors Generating Them," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 0(Special i), pages 75-84, September.
    5. Filip, Bogdan Florin, 2014. "Financial-Monetary Instability Factors within the Framework of the Recent Crisis in Romania," Working Papers of National Institute for Economic Research 141213, Institutul National de Cercetari Economice (INCE).
    6. Samitas, Aristeidis & Polyzos, Stathis, 2016. "Freeing Greece from capital controls: Were the restrictions enforced in time?," Research in International Business and Finance, Elsevier, vol. 37(C), pages 196-213.

    More about this item

    Keywords

    Banking distress; Asia Pacific economies; econometric model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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